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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

Amendment No. 2

 

 

Filed by the Registrant  ☒                             Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

  Preliminary Proxy Statement
  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
  Definitive Proxy Statement
  Definitive Additional Materials
  Soliciting Material under §240.14a-12

ZAFGEN, INC.

(Exact name of registrant as specified in its charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

  No fee required.
  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  (1)  

Title of each class of securities to which transaction applies

 

Common stock, par value $0.01 per share, of Zafgen, Inc. (“Zafgen common stock”)

  (2)  

Aggregate number of securities to which transaction applies:

 

64,550,964 shares of common stock of Zafgen, Inc. (“Zafgen”) to be issued or issuable upon the exercise of options, pursuant to that certain Agreement and Plan of Merger, dated as of December 17, 2019, as amended (the “merger agreement”), by and among Zafgen, Zordich Merger Sub, Inc., a wholly-owned subsidiary of Zafgen, Chondrial Therapeutics, Inc. (“Chondrial”) and Chondrial Therapeutics Holdings, LLC, assuming the exchange ratio determined based on information as to equity ownership as of December 17, 2019 and other assumptions discussed in this proxy statement, including the assumption that Chondrial’s sole stockholder will own approximately 60% of the combined company, on a fully-diluted basis, and that Zafgen stockholders will own approximately 40% of the combined company, on a fully-diluted basis, in each case following the consummation of the transactions contemplated by the merger agreement.

  (3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

The maximum aggregate value was determined based upon 64,550,964 shares of Zafgen common stock being issued in the transaction to Chondrial’s stockholder, multiplied by $1.18, which is the average of high and low trading prices as reported on the NASDAQ Global Market within five business days prior to March 5, 2020. The filing fee was determined by multiplying $0.0001298 by the maximum aggregate value of the transaction as determined in accordance with the preceding sentence.

  (4)  

Proposed maximum aggregate value of transaction:

 

$76,170,137.52

  (5)  

Total fee paid:

 

$9,886.88

  Fee paid previously with preliminary materials.
  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1)  

Amount Previously Paid:

 

$0

  (2)  

Form, Schedule or Registration Statement No.:

 

     

  (3)  

Filing Party:

 

     

  (4)  

Date Filed:

 

     

 

 

 


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PRELIMINARY PROXY STATEMENT DATED APRIL 27, 2020—SUBJECT TO COMPLETION

 

 

LOGO

Dear Zafgen Stockholders:

You are cordially invited to attend the 2020 annual meeting of the stockholders of Zafgen, Inc., a Delaware corporation (referred to as “Zafgen”) which will be held at [●], local time, on [●] (referred to as the “annual meeting”). The annual meeting will be a virtual stockholder meeting, conducted solely through remote audio access via a webcast at http://www.viewproxy.com/Zafgen/2020/VM. In order to attend the annual meeting virtually via the Internet, Zafgen stockholders must register at http://www.viewproxy.com/Zafgen/2020 (click on “Virtual Meeting Registration”) by 11:59 p.m., Eastern Time, on [●], 2020. This is an important annual meeting that affects your investment in Zafgen.

On December 17, 2019, Zafgen and Chondrial Therapeutics, Inc. (referred to as “Chondrial”) entered into an Agreement and Plan of Merger, as amended (referred to as the “merger agreement”), pursuant to which a wholly-owned subsidiary of Zafgen will merge with and into Chondrial with Chondrial surviving as a wholly-owned subsidiary of Zafgen (referred to as the “merger”). At the effective time of the merger, each share of Chondrial’s common stock, par value $0.01 per share, (referred to as “Chondrial common stock”), outstanding immediately prior to the effective time of the merger will be converted into the right to receive approximately [●] shares of Zafgen’s common stock, par value $0.001 per share (referred to as “Zafgen common stock”), subject to adjustment to account for the effect of a reverse stock split of Zafgen common stock, at a ratio mutually agreed to by Zafgen and Chondrial in the range of one new share for every [●] to [●] shares outstanding (or any number in between), to be implemented immediately prior to and contingent upon the consummation of the merger as discussed in this proxy statement, and further adjusted based on Zafgen’s net cash immediately prior to the closing of the merger. Following the merger, Zafgen will change its name to “Larimar Therapeutics, Inc.” (referred to as “Larimar” or the “combined company”).

Under the terms of the merger agreement, the number of shares of Zafgen common stock to be issued to Chondrial’s sole stockholder, Chondrial Therapeutics Holdings, LLC (referred to as “Holdings”), at the closing of the merger will be determined based on an exchange ratio, which will be calculated based on the total number of outstanding shares of Zafgen common stock and Chondrial common stock, each on a fully-diluted basis, and the respective valuations of Chondrial and Zafgen, as of immediately prior to the closing of the merger. As of the effective date of the merger agreement, the closing date valuation of Chondrial (referred to as the “Chondrial valuation”) was assumed to be $67,500,000 but is subject to adjustment as described below, and the closing date valuation of Zafgen (referred to as the “Zafgen valuation”) was assumed to be $45,000,000 but is subject to adjustment as described below. Accordingly, if there is no adjustment to the Zafgen valuation or the Chondrial valuation as described below, then immediately following the effective time of the merger, Chondrial’s sole stockholder, Holdings, will own or hold rights to acquire 60% of the combined company, on a fully-diluted basis, and Zafgen’s stockholders will own or hold rights to acquire 40% of the combined company, on a fully-diluted basis. Without giving effect to the proposed reverse stock split of Zafgen common stock described elsewhere in this proxy statement, and based on the foregoing percentages as of a March 31, 2020 closing, the exchange ratio for the Chondrial common stock would be approximately 645,509.6444 shares of Zafgen common stock for each share of Chondrial common stock (approximately 64,550,964 total shares of Zafgen common stock would be issued to Chondrial’s stockholder, on a fully diluted basis). There will be no adjustment to the number of shares of Zafgen common stock to be issued to Chondrial’s stockholder based on the market value of Zafgen common stock, and the market value of Zafgen common stock may vary significantly from the market value as of the date of this proxy statement. Holdings currently expects that it will distribute the shares of Zafgen common stock it receives in the merger to its members promptly after the completion of the merger.


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In addition, the Zafgen target net cash and lower target net cash and upper target net cash amounts will be reduced by $21,311 per day beginning on March 31, 2020 through the closing date of the merger, and the Chondrial valuation will be increased by $111,656 per day beginning on March 31, 2020 through the closing date of the merger, resulting in a corresponding adjustment to the exchange ratio and a potential adjustment to the ownership percentage of Holdings in the combined company. For a complete description of how the ownership percentages and exchange ratio will be determined at the effective time of the merger, please see the section entitled “The Merger Agreement—Merger Consideration” beginning on page [●] of this proxy statement.

At the annual meeting:

 

   

Zafgen will ask its stockholders to approve the issuance of Zafgen common stock pursuant to the merger agreement, which approval is necessary to complete the transactions contemplated by the merger agreement. Pursuant to the rules of The Nasdaq Stock Market LLC (referred to as the “NASDAQ rules”), the issuance of Zafgen common stock requires the approval of Zafgen’s stockholders because it exceeds 20% of the number of shares of Zafgen common stock outstanding prior to the issuance. Furthermore, the issuance of the shares requires Zafgen’s approval under the NASDAQ rules because it will result in a “change of control” of Zafgen; and

 

   

Zafgen will ask its stockholders to approve an amendment to Zafgen’s ninth amended and restated certificate of incorporation to effect a reverse stock split of Zafgen common stock (referred to as the “reverse stock split”), which approval is also necessary to complete the transactions contemplated by the merger agreement. Upon the effectiveness of the amendment to Zafgen’s ninth amended and restated certificate of incorporation effecting the reverse stock split, the outstanding shares of Zafgen common stock will be combined into a lesser number of shares to be determined by Zafgen’s board of directors (referred to as the “Zafgen Board”) prior to the effective time of such amendment and public announcement by Zafgen.

After careful consideration, the Zafgen Board has unanimously approved the merger agreement and the proposals referred to above, and has determined that they are advisable, fair and in the best interests of Zafgen’s stockholders. Accordingly, the Zafgen Board unanimously recommends that stockholders vote “FOR” the issuance of Zafgen common stock pursuant to the merger agreement and the resulting “change of control” of Zafgen under the NASDAQ rules, “FOR” the amendment to Zafgen’s ninth amended and restated certificate of incorporation to effect the reverse stock split to maintain the listing of Zafgen common stock on the NASDAQ Global Market (referred to as “NASDAQ”), “FOR,” on an advisory, non-binding, basis, the specified compensation that may become payable to Zafgen’s named executive officers in connection with the merger, “FOR,” the election of three directors, Jeffrey S. Hatfield, John L. LaMattina, Ph.D., and Frank E. Thomas, to serve as Class III directors, “FOR,” on an advisory, non-binding, basis, the compensation paid to Zafgen’s named executive officers in 2019, “FOR,” on an advisory, non-binding, basis, the frequency of “every year” for future advisory votes on executive compensation, “FOR” the ratification of the appointment of PricewaterhouseCoopers LLP as Zafgen’s independent registered public accounting firm for the fiscal year ending December 31, 2020 and “FOR” the adjournment of the annual meeting if necessary to solicit additional proxies if there are not sufficient votes to approve the issuance of Zafgen common stock pursuant to the merger agreement and the transactions contemplated therein or to approve an amendment to Zafgen’s ninth amended and restated certificate of incorporation to effect a reverse stock split of Zafgen common stock at the time of the annual meeting.

Shares of Zafgen common stock are currently listed on NASDAQ under the symbol “ZFGN.” After completion of the merger, it is expected that Zafgen common stock will trade on NASDAQ under the symbol “LRMR.”

More information about Zafgen, Chondrial and the proposed transactions are contained in the accompanying proxy statement. Zafgen urges you to read the proxy statement carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE [●].


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Your vote is important. Whether or not you expect to attend the virtual annual meeting, please complete, date, sign and promptly return the accompanying proxy card in the enclosed postage paid envelope to ensure that your shares will be represented and voted at the annual meeting. You can also vote your shares via the internet or by telephone as provided in the instructions set forth in the enclosed proxy card. If you hold your shares in “street name” through a broker, you should follow the procedures provided by your broker.

Zafgen is excited about the opportunities the merger brings to its stockholders, and we thank you for your consideration and continued support.

 

Yours sincerely,

     

Jeffrey S. Hatfield

Chief Executive Officer and Director

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the merger described in this proxy statement or the Zafgen common stock to be issued in connection with the merger or determined if this proxy statement is accurate or adequate. Any representation to the contrary is a criminal offense.

This proxy statement is dated [●], 2020 and is first being mailed to stockholders on or about [●], 2020.


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PRELIMINARY PROXY STATEMENT DATED APRIL 27, 2020—SUBJECT TO COMPLETION

 

 

LOGO

3 CENTER PLAZA, SUITE 610,

BOSTON, MASSACHUSETTS 02108

NOTICE OF 2020 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON [], 2020.

To the Stockholders of Zafgen, Inc.:

Notice is hereby given that the 2020 annual meeting of stockholders of Zafgen, Inc. (referred to as “Zafgen”) will be held virtually, conducted via live audio webcast at [●], local time, on [●], 2020, at http://www.viewproxy.com/Zafgen/2020/VM, to consider and act upon the following matters:

 

  1.

To approve the issuance of Zafgen common stock pursuant to the Agreement and Plan of Merger, dated as of December 17, 2019, as amended, (referred to as the “merger agreement”) by and among Zafgen, Zordich Merger Sub, Inc. (referred to as the “merger subsidiary”), a wholly-owned subsidiary of Zafgen, Chondrial Therapeutics, Inc. (referred to as “Chondrial”) and Chondrial Therapeutics Holdings, LLC (referred to as “Holdings”) and the resulting “change of control” of Zafgen under the rules of The Nasdaq Stock Market LLC (referred to as the “NASDAQ rules”) (referred to as the “share issuance proposal” or “Proposal 1”);

 

  2.

To approve an amendment to Zafgen’s ninth amended and restated certificate of incorporation to effect a reverse stock split of Zafgen common stock (referred to as the “reverse stock split proposal” or “Proposal 2”);

 

  3.

To approve, on an advisory, non-binding, basis, the specified compensation that may become payable to Zafgen’s named executive officers in connection with the merger (referred to as the “advisory merger compensation proposal” or “Proposal 3”);

 

  4.

To elect Jeffrey S. Hatfield, John L. LaMattina, Ph. D. and Frank E. Thomas as Class III directors of the Zafgen Board, to serve until Zafgen’s 2023 annual meeting of stockholders and until their successors are duly executed and qualified, subject to their earlier death, resignation or removal; provided, however, that, if the merger is completed, the board of directors will be reconstituted as provided in the merger agreement (referred to as “Proposal 4”);

 

  5.

To approve, on an advisory, non-binding, basis, the compensation paid to Zafgen’s named executive officers in 2019 (referred to as “Proposal 5”);

 

  6.

To conduct an advisory, non-binding vote on the frequency of future advisory votes on executive compensation (referred to as “Proposal 6”);

 

  7.

To ratify the appointment of PricewaterhouseCoopers LLP as Zafgen’s independent registered public accounting firm for the fiscal year ending December 31, 2020 (referred to as “Proposal 7”); and

 

  8.

To consider and vote upon an adjournment of the annual meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposals 1 and/or 2 (referred to as “Proposal 8”).

If Zafgen is to complete the merger with Chondrial, stockholders must approve Proposal 1 and Proposal 2. The approval of Proposal 3, Proposal 4, Proposal 5, Proposal 6, Proposal 7, or Proposal 8 is not a condition to the completion of the merger with Chondrial.

Zafgen common stock is the only type of security entitled to vote at the annual meeting. The board of directors has fixed [●], 2020 as the record date for the determination of stockholders entitled to notice of, and to vote at, the annual meeting and any adjournment or postponement thereof. Only holders of record of shares of Zafgen common stock at the close of business on the record date are entitled to notice of, and to vote at, the annual meeting. At the close of business on the record date, Zafgen had [●] shares of common stock outstanding


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and entitled to vote at the annual meeting. Each holder of record of shares of common stock on the record date will be entitled to one vote for each share held on all matters to be voted upon at the annual meeting.

Your vote is important. The affirmative vote of the holders of a majority of the votes properly cast on such matter at the annual meeting is required for approval of Proposals 1, 3, 5, 7 and 8. The affirmative vote of holders of a majority of the outstanding shares of Zafgen common stock as of the record date for the annual meeting is required for approval of Proposal 2. For Proposal 4, directors are elected by a plurality of the affirmative votes cast by those shares present virtually, or represented by proxy, and entitled to vote at the annual meeting. The three nominees for director receiving the highest number of affirmative votes will be elected. For Proposal 6, the frequency that receives the highest number of votes will be deemed to be the non-binding recommendation of Zafgen’s stockholders. Whether or not you plan to attend the virtual annual meeting virtually, please submit your proxy promptly by telephone or via the internet in accordance with the instructions on the enclosed proxy card or complete, date, sign and promptly return the accompanying proxy card in the enclosed postage paid envelope to ensure that your shares will be represented and voted at the annual meeting. If you date, sign and return your proxy card without indicating how you wish to vote, your proxy will be counted as a vote in favor of Proposals 1, 2, 3, 5, 7 and 8, and as a vote for each of the directors nominated for election as described in Proposal 4 and for “every year” for Proposal 6.

 

By Order of the Board of Directors of Zafgen, Inc.

 

Jeffrey S. Hatfield

Chief Executive Officer and Director

[●], 2020

Boston, Massachusetts

THE ZAFGEN BOARD HAS DETERMINED AND BELIEVES THAT EACH OF THE PROPOSALS OUTLINED ABOVE IS ADVISABLE, FAIR AND IN THE BEST INTERESTS OF ZAFGEN AND ITS STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED EACH SUCH PROPOSAL. THE ZAFGEN BOARD UNANIMOUSLY RECOMMENDS THAT ZAFGEN’S STOCKHOLDERS VOTE “FOR” PROPOSALS 1, 2, 3, 5, 7 AND 8, “FOR” EACH OF THE DIRECTORS NOMINATED FOR ELECTION AS DESCRIBED IN PROPOSAL 4 AND FOR “EVERY YEAR” FOR PROPOSAL 6.


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REFERENCES TO ADDITIONAL INFORMATION

This proxy statement under Section 14(a) of the Securities Exchange Act of 1934, as amended (referred to as the “Exchange Act”), and the rules thereunder, contains a notice of meeting with respect to the annual meeting of stockholders at which Zafgen’s stockholders will consider and vote on the proposals to approve the issuance of Zafgen common stock issuable to the holders of Chondrial’s common stock pursuant to the merger agreement described in this proxy statement and the resulting “change of control” of Zafgen under the NASDAQ rules, an amendment to Zafgen’s ninth amended and restated certificate of incorporation to effect a reverse stock split of Zafgen common stock to maintain the listing of Zafgen common stock on NASDAQ, the payment of the specified compensation that may become payable to Zafgen’s named executive officers in connection with the merger, the election of Class III directors of the Zafgen Board, the payment of the compensation that was paid to Zafgen’s named executive officers in 2019, the frequency of future advisory votes on the compensation of Zafgen’s named executive officers, the ratification of the appointment of PricewaterhouseCoopers LLP as Zafgen’s registered public accounting firm for fiscal year 2020 and an adjournment of the annual meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposals 1 and/or 2.

Additional business and financial information about Zafgen can be found in documents previously filed by Zafgen with the U.S. Securities and Exchange Commission (referred to as the “SEC”). This information is available to you without charge on the SEC’s website (www.sec.gov), Zafgen stockholders will also be able to obtain the proxy statement, free of charge, from Zafgen by requesting copies in writing using the following contact information:

ZAFGEN, INC.

Attn: Corporate Secretary

3 Center Plaza, Suite 610

Boston, MA 02108

Tel: (617) 622-4003

You may also request additional copies from Zafgen’s proxy solicitor, The Proxy Advisory Group, LLC, using the following contact information:

18 East 41st Street, 20th Floor

New York, NY 10017-6219

Stockholders Call Toll-Free: (888) 337-7699

To ensure timely delivery of these documents, any request should be made no later than [●], 2020 to receive them before the annual meeting. See “Where You Can Find Additional Information” beginning on page [●].


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QUESTIONS AND ANSWERS ABOUT THE ANNUAL  MEETING AND THE MERGER

     v  

SUMMARY

     1  

The Companies

     1  

Summary of the Merger

     3  

Reasons for the Merger

     3  

Opinion of Zafgen’s Financial Advisor

     4  

Overview of the Merger Agreement

     4  

Voting Agreements

     8  

Lock-up Agreements

     8  

Management Following the Merger

     8  

The Board of Directors Following the Merger

     9  

Interests of Zafgen’s Directors and Executive Officers in the Merger

     9  

Federal Securities Law Consequences; Resale Restrictions

     9  

Material U.S. Federal Income Tax Consequences of the Merger

     9  

Risk Factors

     10  

Regulatory Approvals

     10  

Anticipated Accounting Treatment

     10  

Appraisal Rights

     10  

Potential Financing

     10  

SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA

     11  

Selected Historical Consolidated Financial Data of Zafgen

     11  

Selected Historical Financial Data of Chondrial

     12  

Selected Unaudited Pro Forma Combined Financial Data of Zafgen and Chondrial

     13  

Comparative Historical And Unaudited Pro Forma Per Share Data

     14  

MARKET PRICE AND DIVIDEND INFORMATION

     16  

RISK FACTORS

     17  

Risks Related to the Merger

     17  

Risks Related to the Reverse Stock Split

     23  

Risks Related to Zafgen

     23  

Risks Related to Chondrial

     24  

Risks Related to Chondrial’s Financial Position and Need for Capital

     24  

Risks Related to Chondrial’s Product Development and Regulatory Approvals

     27  

Risks Related to Chondrial’s Business

     46  

 

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Risks Related to Chondrial’s Reliance on Third Parties

     52  

Risks Related to Chondrial’s Intellectual Property Rights

     56  

Risks Related to the Combined Company

     65  

CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

     71  

THE MERGER

     73  

Background of the Merger

     73  

Zafgen’s Reasons for the Merger;  Recommendations of the Zafgen Board of Directors

     82  

Recommendation of the Zafgen Board of Directors

     84  

Certain Zafgen Management Unaudited Prospective Financial Information

     84  

Opinion of Zafgen’s Financial Advisor

     86  

Interests of Zafgen’s Directors and Executive Officers in the Merger

     95  

Executive Severance and Change in Control Provisions of Employment Arrangements

     96  

Federal Securities Law Consequences; Resale Restrictions

     99  

Material U.S. Federal Income Tax Consequences of the Reverse Stock Split and the Merger

     99  

THE ANNUAL MEETING

     102  

THE MERGER AGREEMENT

     106  

Form of the Merger

     106  

Effective Time of the Merger

     106  

Merger Consideration and Exchange Ratio

     106  

Determination of Zafgen’s Net Cash

     108  

Determination of Chondrial’s Net Cash

     109  

Equity Awards

     110  

Employees

     111  

Regulatory Approvals

     111  

NASDAQ Listing

     111  

Amendments to Zafgen’s Certificate of Incorporation; Certificate of Incorporation of the Surviving Corporation

     112  

Conditions to the Completion of the Merger

     112  

No Solicitation

     115  

Meeting of Zafgen’s Stockholders

     117  

Directors and Officers Following the Merger

     117  

Indemnification of Officers and Directors

     117  

Covenants; Conduct of Business Pending the Merger

     119  

Other Agreements

     121  

Termination

     122  

 

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Termination Fee

     123  

Amendment

     124  

AGREEMENTS RELATED TO THE MERGER

     125  

Voting Agreements

     125  

Lock-Up Agreements

     125  

ZAFGEN DIRECTORS AND EXECUTIVE OFFICERS

     126  

Zafgen Directors

     126  

Zafgen Executive Officers

     130  

Related Person Transactions

     131  

CORPORATE GOVERNANCE

     132  

Board and Committee Matters

     132  

Audit Committee Report

     136  

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

     138  

EXECUTIVE COMPENSATION

     140  

ZAFGEN DIRECTOR COMPENSATION

     147  

MATTERS BEING SUBMITTED TO A VOTE OF  ZAFGEN’S STOCKHOLDERS

     149  

Proposal 1: Approval of the Issuance of Common Stock in the Merger

     149  

Proposal 2: Approval of the Reverse Stock Split

     149  

Proposal 3: Approval of Zafgen Named Executive Officer Compensation in Connection with the Merger

     155  

Proposal 4: Election of Directors

     156  

Proposal 5: Approval of Zafgen Named Executive Officer Compensation for Fiscal Year 2019

     157  

Proposal 6: Approval of the Frequency of Future Advisory Votes on Executive Compensation

     157  

Proposal 7: Ratification of the Appointment of PricewaterhouseCoopers LLP as Zafgen’s Independent Registered Public Accounting Firm for the Fiscal Year Ending December 31, 2020

     158  

Proposal 8: Approval of Possible Adjournment of the Annual Meeting

     159  

ZAFGEN’S BUSINESS

     160  

ZAFGEN’S PROPERTY

     160  

CHONDRIAL’S BUSINESS

     160  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT ZAFGEN’S MARKET RISK

     182  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT CHONDRIAL’S MARKET RISK

     183  

CHONDRIAL’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     184  

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     196  

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

     200  

 

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QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND THE MERGER

Except as specifically indicated, the following information and all other information contained in this proxy statement does not give effect to the reverse stock split described in Proposal 2.

The following section provides answers to frequently asked questions about the annual meeting of stockholders and the merger. This section, however, only provides summary information. These questions and answers may not address all issues that may be important to you as a stockholder. For a more complete response to these questions and for additional information, please refer to the cross-referenced pages below. You should carefully read this entire proxy statement, including each of the annexes.

 

Q:    What

is the merger?

 

A:

Zafgen, Chondrial, Holdings and Zordich Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Zafgen formed by Zafgen in connection with the merger (referred to as the “merger subsidiary”) have entered into an Agreement and Plan of Merger, dated as of December 17, 2019, as may be amended from time to time (referred to as the “merger agreement”), that contains the terms and conditions of the proposed business combination of Zafgen and Chondrial. Under the merger agreement, at the effective time of the merger, the merger subsidiary will merge with and into Chondrial, with Chondrial surviving as a wholly-owned subsidiary of Zafgen (referred to as the “merger”). As consideration in the merger, Chondrial’s stockholder, Holdings, will be issued a number of shares of Zafgen’s common stock, par value $0.001 per share (referred to as “Zafgen common stock”) determined based on the total number of outstanding shares of Zafgen common stock and shares of Chondrial’s common stock, each on a fully-diluted basis, and the respective valuations of Chondrial and Zafgen, as of immediately prior to the closing of the merger. Immediately following the effective time of the merger, Chondrial’s sole stockholder, Holdings, is expected to own or hold rights to acquire approximately 60% of the combined company, on a fully-diluted basis, and Zafgen’s stockholders will own or hold rights to acquire approximately 40% of the combined company, on a fully-diluted basis, in each case subject to adjustments as described below. Holdings currently expects that it will distribute the shares of Zafgen common stock it receives in the merger to its members promptly after the completion of the merger.

The Zafgen valuation of $45,000,000 is based on a projected “net cash” balance (or cash, cash equivalents and marketable securities minus outstanding liabilities) at the closing of $40,000,000, plus an additional $5,000,000 of enterprise value. If Zafgen’s actual net cash as of a determination date prior to the closing is between $39,500,000 and $40,500,000, no adjustment will be made to the ownership percentages based on Zafgen’s net cash. If Zafgen’s net cash is less than $39,500,000, the ownership percentage of Chondrial’s stockholder in the combined company will be increased based on the difference between Zafgen’s actual net cash and the Zafgen target net cash (i.e. $40,000,000). If Zafgen’s net cash is greater than $40,500,000, the ownership percentage of Chondrial’s stockholder in the combined company will be decreased based on the difference between Zafgen’s actual net cash and the Zafgen target net cash (i.e. $40,000,000). In addition, the Zafgen target net cash and lower target net cash and upper target net cash amounts will be reduced by $21,311 per day beginning on March 31, 2020 through the closing date of the merger, and the Chondrial valuation will be increased by $111,656 per day beginning on March 31, 2020 through the closing date of the merger, resulting in a corresponding adjustment to the exchange ratio and an increase to the ownership percentage of Chondrial’s stockholder in the combined company.

Without giving effect to the proposed reverse stock split of Zafgen common stock described elsewhere in this proxy statement, and based on the foregoing percentages as of a March 31, 2020 closing, the exchange ratio for the Chondrial common stock would be approximately 645,509.6444 shares of Zafgen common stock for each share of Chondrial common stock (approximately 64,550,964 total shares of Zafgen common stock would be issued to Chondrial’s stockholder, on a fully diluted basis).

 

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Q:    What

will happen to Zafgen if, for any reason, the merger with Chondrial does not close?

 

A:

Zafgen has invested significant time and incurred, and expects to continue to incur, significant expenses related to the proposed merger with Chondrial. In the event the merger does not close, Zafgen will have a limited ability to continue its current operations without obtaining additional financing. Although the Zafgen Board may elect, among other things, to attempt to complete another strategic transaction if the merger with Chondrial does not close, the Zafgen Board may instead divest all or a portion of Zafgen’s business or take steps necessary to liquidate or dissolve Zafgen’s business and assets if a viable alternative strategic transaction is not available. If Zafgen decides to dissolve and liquidate its assets, Zafgen would be required to pay all of its contractual obligations, and to set aside certain reserves for potential future claims, and there can be no assurance as to the amount or the timing of such a liquidation and distribution of available cash left to distribute to stockholders after paying the obligations of Zafgen and setting aside funds for reserves.

 

Q:    Why

is Zafgen proposing to merge with Chondrial?

 

A:

The Zafgen Board considered a number of factors that supported its decision to approve the merger agreement. In the course of its deliberations, the Zafgen Board also considered a variety of risks and other countervailing factors related to entering into the merger agreement.

For a more complete discussion of Zafgen’s reasons for the merger, please see the section entitled “The Merger—Zafgen’s Reasons for the Merger; Recommendations of the Zafgen Board of Directors” beginning on page [●] of this proxy statement.

 

Q:    What

is required to consummate the merger?

 

A:

The consummation of the proposed merger with Chondrial is subject to a number of closing conditions, including the condition that Zafgen’s stockholders approve the issuance of shares of Zafgen common stock in the merger and the resulting “change of control” of Zafgen under the NASDAQ rules, which requires the affirmative vote of a majority of the votes properly cast on such matter at the annual meeting, and the reverse stock split, which requires the affirmative vote of the holders of a majority of the outstanding shares of Zafgen common stock entitled to vote on such matter. For a more complete description of the closing conditions under the merger agreement, please see the section entitled “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page [●] of this proxy statement.

 

Q:

Are there any federal or state regulatory requirements that must be complied with or federal or state regulatory approvals or clearances that must be obtained in connection with the merger?

 

A:

Neither Zafgen nor Chondrial is required to make any filings or to obtain any approvals or clearances from any antitrust regulatory authorities in the United States or other countries to consummate the merger. In the United States, Zafgen must comply with applicable federal and state securities laws and the NASDAQ rules in connection with the issuance of shares of Zafgen common stock in the merger, including the filing with the SEC of this proxy statement and the required stockholder approval for the resulting “change of control” of Zafgen under the NASDAQ rules. Prior to consummation of the merger, Zafgen intends to file an initial listing application with NASDAQ pursuant to NASDAQ’s “reverse merger” rules and to effect the initial listing of Zafgen common stock issuable in connection with the merger.

 

Q:    What

will Chondrial’s stockholder receive in the merger?

 

A:

Subject to the terms of the merger agreement, the percentage of the combined company that Chondrial’s sole stockholder will own as of the closing of the merger will be determined based on the total number of outstanding shares of Zafgen common stock and Chondrial common stock, each on a fully-diluted basis, and the respective valuations of Chondrial and Zafgen, as of immediately prior to the closing of the merger. On a pro forma basis, based upon the number of shares of Zafgen common stock to be issued in the merger and

 

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  the closing occurring on or before March 31, 2020, (i) current Zafgen stockholders will own or hold rights to acquire 40% of the combined company, on a fully-diluted basis, and Chondrial’s stockholder will own or hold rights to acquire 60% of the combined company, on a fully-diluted basis, if Zafgen’s net cash is between the range of $39,500,000 and $40,500,000 as of the determination date. If Zafgen’s cash is less than $39,500,000 or greater than $40,500,000, the ownership percentages will be adjusted based on, among other things, the difference between the actual net cash and the target Zafgen net cash (i.e. $40,000,000). Holdings currently expects that it will distribute the shares of Zafgen common stock it receives in the merger to its members promptly after the completion of the merger.

For a more complete discussion of the exchange ratio at the effective time of the merger, please see the section entitled “The Merger Agreement—Merger Consideration” beginning on page [●] of this proxy statement.

 

Q:    What

are the material federal income tax consequences of the merger to me?

 

A:

The merger has been structured to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (referred to as the “Code”). Zafgen stockholders will not sell, exchange or dispose of any shares of Zafgen common stock as a result of the merger. Thus, there will be no material U.S. federal income tax consequences to Zafgen stockholders as a result of the merger.

For a more complete description of the tax consequences of the merger, please see the section entitled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page [●] of this proxy statement.

 

Q:

Why is Zafgen seeking stockholder approval to issue shares of common stock to existing stockholders of Chondrial in the merger?

 

A:

Because Zafgen common stock is listed on NASDAQ, we are subject to the NASDAQ rules. Rule 5635(a) of the NASDAQ rules requires stockholder approval with respect to issuances of Zafgen common stock, among other instances, when the shares to be issued are being issued in connection with the acquisition of the stock or assets of another company and are equal to 20% or more of the outstanding shares of Zafgen common stock before the issuance. Rule 5635(b) of the NASDAQ rules also requires stockholder approval when any issuance or potential issuance will result in a “change of control” of the issuer. Although NASDAQ has not adopted any rule on what constitutes a “change of control” for purposes of Rule 5635(b), NASDAQ has previously indicated that the acquisition of, or right to acquire, by a single investor or affiliated investor group, as little as 20% of the common stock (or securities convertible into or exercisable for common stock) or voting power of an issuer could constitute a change of control.

In the case of the merger, Zafgen will be issuing approximately 64,550,964 shares of its common stock on a fully diluted basis, and the common stock to be issued pursuant to the merger agreement will represent greater than 20% of its voting stock. Accordingly, Zafgen is seeking stockholder of approval of this issuance under the NASDAQ rules.

 

Q:    What

is the reverse stock split and why is it necessary?

 

A:

Immediately prior to the effective time of the merger, the outstanding shares of Zafgen common stock will be combined into a lesser number of shares to be determined by the Zafgen Board prior to the effective time and publicly announced by Zafgen. The Zafgen Board believes that a reverse stock split may be desirable for a number of reasons. Zafgen common stock is currently, and will be following the completion of the merger, listed on NASDAQ. According to the applicable NASDAQ rules, in order for Zafgen common stock to continue to be listed on NASDAQ, Zafgen must satisfy certain requirements established by NASDAQ. The Zafgen Board expects that a reverse stock split of Zafgen common stock will increase the market price of Zafgen common stock so that Zafgen will be able to maintain compliance with the relevant

 

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  NASDAQ listing requirements for the foreseeable future, although Zafgen cannot assure that it will be able to do so. The Zafgen Board intends to effect a reverse stock split of the shares of Zafgen common stock at a ratio of between [●] and [●].

 

Q:    Why

am I receiving this proxy statement?

 

A:

You are receiving this proxy statement because you have been identified as a stockholder of Zafgen as of the record date, and thus you are entitled to vote at Zafgen’s annual meeting. This document contains important information about the merger and the annual meeting of Zafgen and serves as a proxy statement of Zafgen used to solicit proxies for the annual meeting, and you should read it carefully.

 

Q:    How

does Zafgen’s board of directors recommend that Zafgen’s stockholders vote?

 

A:    After

careful consideration, the Zafgen Board unanimously recommends that Zafgen’s stockholders vote:

 

   

FOR Proposal 1 to approve the issuance of Zafgen common stock pursuant to the merger agreement and the resulting “change of control” of Zafgen under the NASDAQ rules;

 

   

FOR Proposal 2 to approve an amendment to Zafgen’s ninth amended and restated certificate of incorporation to effect the reverse stock split to maintain the listing of Zafgen common stock on NASDAQ;

 

   

FOR Proposal 3 to approve, on a non-binding, advisory basis, the compensation that may become payable to Zafgen’s named executive officers that is based on or otherwise relates to the merger;

 

   

In Proposal 4, FOR the election of each of the three directors, Jeffrey S. Hatfield, John L. LaMattina, Ph.D., and Frank E. Thomas, to serve as Class III directors until the 2023 annual meeting of stockholders and until their successors are duly elected and qualified, subject to their earlier death, resignation or removal; provided, however, that, if the merger is completed, the board of directors will be reconstituted as provided in the merger agreement;

 

   

FOR Proposal 5 to approve, on an advisory, non-binding, basis, the compensation paid to Zafgen’s named executive officers in 2019;

 

   

In Proposal 6, FOR “every year” on the advisory, non-binding vote to approve the frequency of future advisory votes on executive compensation;

 

   

FOR Proposal 7 to ratify the appointment of PricewaterhouseCoopers LLP as Zafgen’s independent registered public accounting firm for the fiscal year ending December 31, 2020; and

 

   

FOR Proposal 8 to approve an adjournment of the annual meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposals 1 and 2.

 

Q:

What risks should Zafgen’s stockholders consider in deciding whether to vote in favor of the share issuance and the reverse stock split?

 

A:

Zafgen’s stockholders should carefully read the section of this proxy statement entitled “Risk Factors” beginning on page [●], which sets forth certain risks and uncertainties related to the merger and reverse stock split, risks and uncertainties to which the combined company’s business will be subject, risks and uncertainties to which Zafgen, as an independent company, is subject and risks and uncertainties to which Chondrial, as an independent company, is subject.

 

Q:    When

do you expect the merger to be consummated?

 

A:

The consummation of the merger will occur as promptly as practicable after the annual meeting and following satisfaction or waiver of all closing conditions. Zafgen and Chondrial anticipate that the

 

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  consummation of the merger will occur in the second quarter of 2020. However, the exact timing of the consummation of the merger is not yet known. For a more complete description of the closing conditions under the merger agreement, please see the section entitled “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page [●] of this proxy statement.

 

Q:    How

will the merger affect options to acquire units of Holdings?

 

A:

Upon the effectiveness of the merger, each outstanding option to purchase Holdings units, whether vested or unvested, will be substituted for an equivalent option to purchase shares of Zafgen common stock, as adjusted by the exchange ratio. For a more complete discussion of the effect of the merger on equity awards of Holdings, please see that section entitled “The Merger Agreement—Equity Awards” beginning on page [●] of this proxy statement.

 

Q:

How will the reverse stock split and the merger affect stock options to acquire Zafgen common stock, Zafgen restricted stock units and Zafgen’s stock option and incentive plans?

 

A:

The Zafgen Amended and Restated 2006 Stock Option Plan and the Zafgen 2014 Stock Option and Incentive Plan will remain in effect following the merger, and all stock options to acquire shares of Zafgen common stock that are outstanding immediately prior to the effective time of the merger will remain outstanding following the effective time of the merger. As of the effective time of the reverse stock split, Zafgen will adjust and proportionately decrease the number of shares of Zafgen common stock that may be the subject of future grants under Zafgen’s 2014 Stock Option and Incentive Plan. Additionally, as of the effective time of the reverse stock split, Zafgen will (i) adjust and proportionately decrease the number of shares of Zafgen common stock subject to, and adjust and proportionately increase the exercise price of, all stock options to acquire Zafgen common stock, and (ii) adjust and proportionately decrease the number of shares of Zafgen common stock subject to settlement of all restricted stock unit awards for Zafgen common stock.

Q:    What do I need to do now?

 

A:

You are urged to read this proxy statement carefully, including each of the annexes, and to consider how the merger affects you. If your shares are registered directly in your name, you may submit your proxy promptly by telephone or via the internet in accordance with the instructions on the enclosed proxy card or complete, date and sign the enclosed proxy card and mail return it in the enclosed postage-paid envelope. Alternatively, you can vote online during the annual meeting. To attend and participate in the annual meeting, Zafgen stockholders must register in advance at https://www.viewproxy.com/Zafgen/2020 prior to the deadline of 11:59 p.m. Eastern Time on [●], 2020. If your shares of Zafgen common stock are held by a bank, broker or other nominee, you are considered the beneficial owner of shares held in “street name,” and the proxy materials are being forwarded to you together with a voting instruction card. Since a beneficial owner is not the stockholder of record, you may not vote these shares at the annual meeting unless you obtain a proxy from your broker issued in your name giving you the right to vote the shares at the annual meeting.

 

Q:    How

many shares must be represented to have a quorum and hold the annual meeting?

 

A:

A quorum of Zafgen’s stockholders is necessary to hold a valid meeting. A quorum will be present if Zafgen stockholders of record holding at least a majority of Zafgen’s outstanding common stock entitled to vote at the annual meeting are present or represented by proxy. Abstentions and broker non-votes will be counted toward a quorum. On the record date, there were [●] shares of Zafgen common stock outstanding and entitled to vote. Thus, the holders of [●] shares of Zafgen common stock must be represented by proxy or vote via the Internet at the annual meeting to have a quorum. Your shares will be counted towards the quorum if you submit a valid proxy (or one is submitted on your behalf by your broker, bank or other nominee) or if you vote via the Internet at the annual meeting. Abstentions and broker non-votes, if

 

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  applicable, will also be counted towards the quorum requirement. If there is no quorum, the holders of a majority of shares at the meeting represented by proxy or voting via the Internet during the annual meeting may adjourn the meeting to another date.

 

Q:    What

happens if I do not return a proxy card or otherwise fail to provide proxy instructions?

 

A:

The failure to return your proxy card or otherwise fail to provide proxy instructions will have the same effect as voting against Proposal 2, and your shares will not be counted for purposes of determining whether a quorum is present at the annual meeting. If your shares are held in street name, and you do not provide voting instructions, your broker or nominee can still vote the shares with respect to matters that are considered to be “discretionary,” but may not vote the shares with respect to “non-discretionary” matters. Under rules applicable to broker-dealers, Proposals 1, 3, 4, 5 and 6 are considered non-discretionary matters. Proposals 2, 7 and 8 qualify as discretionary matters.

 

Q:    May

I vote in person?

 

A:

Zafgen will be hosting the annual meeting via live audio webcast on the Internet at http://www.viewproxy.com/Zafgen/2020/VM. You will not be able to attend the annual meeting in person. If you are a Zafgen stockholder and your shares of Zafgen common stock are registered directly in your name with Zafgen’s transfer agent, you are considered, with respect to those shares, the stockholder of record, and the proxy materials and proxy card are being sent directly to you by Zafgen. Zafgen stockholders of record who wish to attend the Annual Meeting must register at http://www.viewproxy.com/Zafgen/2020 (click on “Virtual Meeting Registration”) by 11:59 p.m., Eastern Time, on [●], 2020, although Zafgen encourages you to vote by proxy at your earliest convenience to ensure your shares are represented, in case you later decide not to listen to the annual meeting via the Internet. Upon completing registration, eligible participants will receive further instructions via email, including unique links that will allow such eligible participants to access the annual meeting. Eligible participants who have difficulty accessing the virtual annual meeting or the meeting registration website may call the technical support number provided. Zafgen stockholders will be provided an opportunity to ask questions of the Zafgen Board and Zafgen’s management. Please refer to the 2020 Annual Meeting FAQs included in the “Virtual Meeting Registration” tab for further registration instructions and technical support.

If your shares of Zafgen common stock are held by a bank, broker or other nominee, you are considered the beneficial owner of shares held in “street name,” and the proxy materials are being forwarded to you together with a voting instruction card. Since a beneficial owner is not the stockholder of record, you may not vote these shares during the annual meeting unless you obtain a proxy from your broker issued in your name giving you the right to vote the shares at the annual meeting.

 

Q:    If

my Zafgen shares are held in “street name” by my broker, will my broker vote my shares for me?

 

A:

Broker non-votes occur when a beneficial owner of shares held in “street name” does not give instructions to the broker or nominee holding the shares as to how to vote on matters deemed “non-discretionary.” Generally, if shares are held in street name, the beneficial owner of the shares is entitled to give voting instructions to the broker or nominee holding the shares. If the beneficial owner does not provide voting instructions, the broker or nominee can still vote the shares with respect to matters that are considered to be “discretionary,” but may not vote the shares with respect to “non-discretionary” matters. Your broker will not be able to vote your shares of Zafgen common stock without specific instructions from you for “non-discretionary” matters. You should instruct your broker to vote your shares, following the procedures provided by your broker. Under rules applicable to broker-dealers, Proposals 1, 3, 4, 5 and 6 are considered non-discretionary matters. Proposals 2, 7 and 8 qualify as discretionary matters.

 

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Q:    May

I change my vote after I have submitted a proxy by telephone or via the internet or mailed my signed proxy card?

 

A:

Any Zafgen stockholder of record voting by proxy, other than those Zafgen stockholders who have executed a voting agreement, has the right to revoke the proxy at any time before the polls close at the annual meeting by delivery of a written notice stating that he, she or it would like to revoke his, her or its proxy to the Corporate Secretary of Zafgen, by providing a duly executed proxy card bearing a later date than the proxy being revoked, by submitting a proxy on a later date by telephone or via the internet (only your last telephone or internet proxy will be counted), before [●] Eastern Time on [●] or by attending the annual meeting via the Internet and voting during the annual meeting. Attendance alone at the annual meeting will not revoke a proxy. If a stockholder of Zafgen has instructed a broker to vote its shares of Zafgen common stock that are held in “street name,” the stockholder must follow directions received from its broker to change those instructions.

 

Q:    Who

will count the vote?

 

A:

Votes will be counted by the inspector of elections appointed for the annual meeting, who will separately count “FOR” and “AGAINST” votes and abstentions.

 

Q:    Should

Zafgen’s stockholders send in their stock certificates now?

 

A:

No. After the merger is consummated, and if the reverse stock split is approved, Zafgen’s stockholders will receive written instructions, as applicable, from Zafgen’s transfer agent for exchanging their certificates representing shares of Zafgen common stock for new certificates giving effect to the reverse stock split.

 

Q:    Am

I entitled to appraisal rights?

 

A:

Zafgen’s stockholders are not entitled to appraisal rights in connection with the merger or any of the proposals to be voted on at the annual meeting.

 

Q:    Has

Chondrial’s stockholder agreed to adopt the merger agreement?

 

A:

Yes. On December 16, 2019, Chondrial’s sole stockholder, Holdings, adopted the merger agreement and approved the merger and related transactions at a joint meeting of the sole stockholder of Chondrial and board of managers of Holdings.

 

Q:    Have

any of Zafgen’s stockholders agreed to vote in favor of the issuance of the shares in the merger?

 

A:

Yes. In connection with the execution of the merger agreement, holders of approximately 9.7% of the outstanding shares of Zafgen common stock have entered into voting agreements, as further described in the section entitled “Agreements Related To The Merger” beginning on page [●] of this proxy statement, with Zafgen and Chondrial that provide, among other things, that the stockholders subject to these agreements will vote in favor of the issuance of shares of Zafgen common stock in the merger and grant to Chondrial an irrevocable proxy to vote all of such stockholders’ shares of Zafgen common stock in favor of the approval of the issuance of the shares of Zafgen common stock in the merger and against any proposal made in opposition to, or in competition with, the issuance of shares of Zafgen common stock in the merger.

For a more complete discussion of the exchange ratio at the effective time of the merger, please see the section entitled “The Merger Agreement—Merger Consideration” beginning on page [●] of this proxy statement.

 

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Q:    Who

is paying for this proxy solicitation?

 

A:

Zafgen will bear the cost of soliciting proxies, including the printing, mailing and filing of this proxy statement, the proxy card and any additional information furnished to Zafgen’s stockholders. You will need to obtain your own internet access if you choose to access the proxy materials and/or vote over the internet. Zafgen and Chondrial may use the services of its directors, officers and other employees to solicit proxies from Zafgen’s stockholders without additional compensation. In addition, Zafgen has engaged The Proxy Advisory Group, LLC, a proxy solicitation firm, to assist in the solicitation of proxies and provide related advice and informational support, for a services fee and the reimbursement of customary disbursements, which are not expected to exceed $20,000 in total. Arrangements will also be made with banks, brokers, nominees, custodians and fiduciaries who are record holders of Zafgen common stock for the forwarding of solicitation materials to the beneficial owners of Zafgen common stock. Zafgen will reimburse these banks, brokers, nominees, custodians and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.

 

Q:    Who

can provide me with additional information and help answer my questions?

 

A:

If you would like additional copies, without charge, of this proxy statement or if you have questions about the merger and the other proposals being considered at the annual meeting, including the procedures for voting your shares, you should contact The Proxy Advisory Group, LLC, Zafgen’s proxy solicitor, by telephone at (888) 337-7699.

 

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SUMMARY

This summary highlights selected information from this proxy statement and may not contain all of the information that is important to you. To better understand the merger and the other proposals being considered at the annual meeting, you should read this entire proxy statement carefully, including the materials attached as annexes, as well as other documents referred to or incorporated by reference herein. You may obtain the information incorporated by reference into this proxy statement without charge by following the instructions under the section of this proxy statement entitled “Where You Can Find Additional Information”.

The Companies

Zafgen, Inc.

3 Center Plaza, Suite 610

Boston, Massachusetts 02108

(617) 622-4003

Zafgen is a biopharmaceutical company that has leveraged its proprietary methionine aminopeptidase 2 (referred to as “MetAP2”) biology platform to pioneer the study of MetAP2 inhibitors in both common and rare metabolic disorders. Zafgen’s prior lead product candidate, ZGN-1061, is a MetAP2 inhibitor that was in Phase 2 clinical development for the treatment of type 2 diabetes and other related metabolic disorders. In November 2018, Zafgen received a letter from the U.S. Food and Drug Administration (referred to as the “FDA”) placing a full clinical hold on the investigational new drug application (referred to as “IND”) for the first U.S. clinical trial of ZGN-1061. The FDA cited the possibility of cardiovascular safety risk based on Zafgen’s prior compound. In July 2019, Zafgen reached agreement with the FDA on an in vivo animal study design and protocol to establish relevant safety margins for ZGN-1061. The study was designed to translate the data from Zafgen’s newly developed in vitro assays of human endothelial cells and assessment of tissue factor expression with endothelial cells, along with other supportive assays, as Zafgen worked toward resolving the full clinical hold. Based on the preliminary results from the in vivo study, on September 5, 2019, Zafgen announced that it believed there is a low probability of resolving the clinical hold in the near-term. Subsequently, all further development activities of MetAP2 inhibitors were halted and Zafgen withdrew the IND for ZGN-1061 in September 2019.

Zordich Merger Sub, Inc.

3 Center Plaza, Suite 610

Boston, Massachusetts 02108

(617) 622-4003

The merger subsidiary is a wholly-owned subsidiary of Zafgen that was recently incorporated in Delaware for the purpose of the merger. It does not conduct any business and has no material assets.

Chondrial Therapeutics, Inc.

150 Monument Rd

Bala Cynwyd, PA 19004

844-511-9056

Chondrial is a clinical-stage biotechnology company focused on developing treatments for patients suffering from complex rare diseases using its novel cell penetrating peptide technology platform. Chondrial’s lead product candidate, CTI-1601, is a subcutaneously administered, recombinant fusion protein intended to deliver human frataxin (referred to as “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 enough



 

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FXN due to a genetic abnormality and for which there is currently no effective therapy. Chondrial has received orphan drug status, fast track designation, and rare pediatric disease designation from the FDA for CTI-1601.

Chondrial is currently evaluating CTI-1601 in a single ascending dose (referred to as “SAD”) Phase 1 clinical trial in patients with Friedreich’s Ataxia. The first two cohorts of patients have completed the SAD clinical trial; however, due to the continued impact of coronavirus (referred to as “COVID-19”), Chondrial has delayed initiation of the next cohort in the SAD clinical trial. Chondrial is conducting the clinical trial 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. The travel advisories and risk of infection related to COVID-19 have presented increased risks to patients traveling to Chondrial’s clinical trial site for dosing. Due to the uncertainty surrounding COVID-19, Chondrial cannot estimate when the next cohort of patients will begin the clinical trial. While top line results from the SAD and the planned multiple ascending dose (referred to as “MAD”) 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 may result in top line results being delayed until the first half of 2021.

Chondrial intends to work closely with regulatory authorities in the design of its clinical program for CTI-1601. Regulatory authorities in the United States and European Union have not issued definitive guidance as to how to measure and achieve efficacy in treatments for Friedreich’s Ataxia. As a result, the design and conduct of clinical trials of CTI-1601 may take longer or be more costly due to the novelty of development in Friedreich’s Ataxia. Chondrial may use new or novel endpoints or methodologies, which regulatory authorities may disagree with. Even if applicable regulatory authorities do not object to Chondrial’s proposed endpoints in an earlier stage clinical trial, such regulatory authorities may require evaluation of additional or different clinical endpoints in a later-stage clinical trial.

In addition to its Phase 1 clinical trials, Chondrial is also evaluating CTI-1601 in GLP toxicology studies, including 90-day GLP toxicity studies in rats and non-human primates (referred to as “NHPs”). These studies are ongoing and the results of these studies are intended to be used to support the initiation of clinical trials that require the administration of CTI-1601 for longer than 28 days. During the course of the NHP study, Chondrial observed occasional transient rigidity immediately after dosing in certain NHPs. These NHPs required no intervention and the NHPs completed the in-life portion of the study. As this study is ongoing, Chondrial and its consultants are conducting additional analysis and awaiting certain results. The results from this study as well as the results from other toxicology studies could affect the timing and design of the development program for CTI-1601.

Chondrial is dependent on certain intellectual property licensed from Wake Forest University Health Sciences (referred to as “WFUHS”) and Indiana University (referred to as “IU”) for the development and, if approved, commercialization of CTI-1601.

The Combined Company

At the effective time of the merger, the current stockholders of Zafgen and Chondrial’s stockholder, Holdings, are expected to own or hold rights to acquire approximately 40% and 60% of the combined company, respectively, on a fully-diluted basis, which is based among other things on Zafgen’s estimated net cash balance (or cash, cash equivalents and marketable securities minus outstanding liabilities) at the closing of $40,000,000, plus an additional $5,000,000 of enterprise value. Holdings currently expects that it will distribute the shares of Zafgen common stock it receives in the merger to its members promptly after the completion of the merger. The ownership percentage is subject to adjustment based on Zafgen’s net cash as of a certain determination date, as discussed in “The Merger Agreement—Merger Consideration.” Concurrently with the consummation of the merger, the combined company may complete a financing transaction. The principal executive office of the combined company will be located in Bala Cynwyd, Pennsylvania.



 

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Summary of the Merger

Upon the terms and subject to the conditions of the merger agreement, the merger subsidiary, a wholly-owned subsidiary of Zafgen formed by Zafgen in connection with the merger, will merge with and into Chondrial. The merger agreement provides that upon the consummation of the merger the separate existence of merger subsidiary shall cease. Chondrial will continue as the surviving corporation and will be a wholly-owned subsidiary of Zafgen. Immediately following the effective time of the merger, Chondrial’s sole stockholder, Holdings, is expected to own approximately 60% of the combined company, on a fully-diluted basis, and Zafgen’s stockholders will own or hold rights to acquire approximately 40% of the combined company, on a fully-diluted basis, in each case subject to adjustments as described below. Holdings currently expects that it will distribute the shares of Zafgen common stock it receives in the merger to its members promptly after the completion of the merger.

The Zafgen valuation of $45,000,000 is based on a projected “net cash” balance (or cash, cash equivalents and marketable securities minus outstanding liabilities) at the closing of $40,000,000, plus an additional $5,000,000 of enterprise value. If Zafgen’s actual net cash as of a determination date prior to the closing is between $39,500,000 and $40,500,000, no adjustment will be made to the ownership percentages based on Zafgen’s net cash. If Zafgen’s net cash is less than $39,500,000, the ownership percentage of Chondrial’s stockholder in the combined company will be increased based on the difference between Zafgen’s actual net cash and the Zafgen target net cash (i.e. $40,000,000). If Zafgen’s net cash is greater than $40,500,000, the ownership percentage of Chondrial’s stockholder in the combined company will be decreased based on the difference between Zafgen’s actual net cash and the Zafgen target net cash (i.e. $40,000,000). In addition, the Zafgen target net cash and lower target net cash and upper target net cash amounts will be reduced by $21,311 per day beginning on March 31, 2020 through the closing date of the merger, and the Chondrial valuation will be increased by $111,656 per day beginning on March 31, 2020 through the closing date of the merger, resulting in a corresponding adjustment to the exchange ratio and an increase to the ownership percentage of Chondrial’s stockholder in the combined company. Assuming Zafgen’s actual net cash were $40.0 million at closing, and if below that then Zafgen’s ownership would be further decreased, and the closing were to occur 30 days, 60 days or 90 days after March 31, 2020 the ownership in the combined company would be the following:

 

     30 days after
March 31, 2020
    60 days after
March 31, 2020
    90 days after
March 31, 2020
 

Zafgen’s ownership

     38.8     37.8     36.7

Chondrial’s ownership

     61.2     62.2     63.3

Without giving effect to the proposed reverse stock split of Zafgen common stock described elsewhere in this proxy statement, and based on the foregoing percentages as of a March 31, 2020 closing, the exchange ratio for the Chondrial common stock would be approximately 645,509.6444 shares of Zafgen common stock for each share of Chondrial common stock (approximately 64,550,964 total shares of Zafgen common stock would be issued to Chondrial’s stockholder, on a fully diluted basis). Following the merger, Zafgen will change its name to “Larimar Therapeutics, Inc.” (referred to as “Larimar” or the combined company).

Reasons for the Merger

The Zafgen Board considered various reasons for the merger, including, among others, the following factors:

 

   

information concerning Zafgen’s business, financial performance (both past and prospective) and its financial condition, results of operation (both past and prospective), business and strategic objectives, as well as the risks of accomplishing those objectives;

 

   

Zafgen’s business and financial prospects if it were to remain an independent company and the Zafgen Board’s determination that Zafgen could not continue to operate as an independent company and needed to enter into an agreement with a strategic partner;



 

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the possible alternatives to the merger, the range of possible benefits and risks to the Zafgen stockholders of those alternatives and the timing and the likelihood of accomplishing the goal of any of such alternatives and the Zafgen Board’ assessment that the merger presented a superior opportunity to such alternatives for Zafgen stockholders;

 

   

the Zafgen Board’s view of the valuation of the potential merger candidates. In particular, the Zafgen Board’s view that Chondrial was the most attractive candidate because of its novel clinical and nonclinical protein replacement therapy programs and the Zafgen Board’s belief that the merger would create a publicly traded company focused on improving the lives of patients with rare diseases, initially Friedreich’s Ataxia, which currently has no approved therapies for treatment, and its belief that the merger with Chondrial will create more value for Zafgen’s stockholders than any of the other proposals that the Zafgen Board had received or that Zafgen could create as a standalone company; and

 

   

the ability of Zafgen’s stockholders to participate in the future growth potential of the combined company following the merger.

For more information on the Zafgen Board’s reasons for the transaction, see the section entitled “The Merger—Zafgen’s Reasons for the Merger; Recommendation of the Zafgen Board of Directors.”

Opinion of Zafgen’s Financial Advisor

Zafgen retained MTS Health Partners, L.P. as a financial advisor in connection with the merger. On December 17, 2019, MTS Securities, LLC, a wholly-owned subsidiary of MTS Health Partners, L.P., rendered its oral opinion to the Zafgen Board (which was subsequently confirmed in writing as of December 17, 2019), that, as of that date and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth in such written opinion and described below, the Exchange Ratio (as defined in the merger agreement) is fair, from a financial point of view, to the holders of Zafgen common stock.

The full text of the written opinion of MTS Securities, LLC (referred to as the “MTS Opinion”) sets forth the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken by MTS Securities, LLC in connection with its opinion. The MTS Opinion is attached as Annex C to this proxy statement and is incorporated herein by reference. The summary of the MTS Opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of the MTS Opinion. We urge you to read carefully the MTS Opinion, together with the summary thereof in this proxy statement, in its entirety.

MTS Securities, LLC provided its opinion for the information and assistance of the Zafgen Board in connection with its consideration of the merger. The MTS Opinion addressed solely the fairness, from a financial point of view, of the Exchange Ratio (as defined in the merger agreement), to the holders of Zafgen common stock in the merger and does not address any other aspect or implication of the merger. The MTS Opinion was not a recommendation to the Zafgen Board or any stockholder of Zafgen as to how to vote or to take any other action in connection with the merger.

Overview of the Merger Agreement

Merger Consideration

At the effective time of the merger:

 

   

any shares of Chondrial common stock held as treasury stock immediately prior to the effective time of the merger shall be canceled and retired and shall cease to exist with no consideration delivered in exchange therefor; and

 

   

each share of Chondrial common stock outstanding immediately prior to the effective time (excluding shares of Chondrial common stock held as treasury stock) shall be converted solely into the right to



 

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receive a number of shares of Zafgen common stock equal to the Exchange Ratio (as defined in the merger agreement), which will be calculated based on the total number of outstanding shares of Zafgen common stock and Chondrial common stock, each on a fully-diluted basis, and the respective valuations of Chondrial and Zafgen, as of immediately prior to the closing of the merger, as described below. subject to adjustment to account for the reverse stock split; and

 

   

no fractional shares of Zafgen common stock will be issuable to Chondrial’s stockholder pursuant to the merger.

Under the terms of the merger agreement, the Exchange Ratio (as defined in the merger agreement), or the number of shares of Zafgen common stock to be issued to Chondrial’s stockholder, Holdings, for each share of Chondrial common stock outstanding at the closing of the merger, will be calculated based on the total number of outstanding shares of Zafgen common stock and Chondrial common stock, each on a fully-diluted basis, and the respective valuations of Chondrial and Zafgen, as of immediately prior to the closing of the merger. As of the effective date of the merger agreement, the closing date valuation of Chondrial (referred to as the “Chondrial valuation”) was assumed to be $67,500,000 but is subject to adjustment as described below, and the closing date valuation of Zafgen (referred to as the “Zafgen valuation”) was assumed to be $45,000,000 but is subject to adjustment as described below. Accordingly, if there is no adjustment to the Zafgen valuation as described below, then immediately following the effective time of the merger, Chondrial’s sole stockholder, Holdings, will own or hold rights to acquire 60% of the combined company, on a fully-diluted basis, and Zafgen’s stockholders will own or hold rights to acquire 40% of the combined company, on a fully-diluted basis. Holdings currently expects that it will distribute the shares of Zafgen common stock it receives in the merger to its members promptly after the completion of the merger.

The Zafgen valuation was determined based on a projected net cash balance (defined in the merger agreement as cash, cash equivalents and marketable securities minus certain outstanding liabilities) of $40,000,000 as of a determination date prior to the closing of the merger (referred to as the “target Zafgen net cash”), but subject to adjustment as described below, plus an additional $5,000,000 of enterprise value. If Zafgen’s actual net cash balance as of a determination date prior to the closing (referred to as the “closing Zafgen net cash”) is between a lower net cash target of $39,500,000, subject to adjustment as described below (referred to as the “lower target net cash”) and an upper net cash target of $40,500,000, subject to adjustment as described below (referred to as the “upper target net cash”), no adjustment will be made to the Zafgen valuation. If closing Zafgen net cash is less than the lower net cash target, the Zafgen valuation will be decreased by the difference between the closing Zafgen net cash and the target Zafgen net cash, resulting in a corresponding adjustment to the exchange ratio and an increase to the ownership percentage of Holdings in the combined company. If closing Zafgen net cash is greater than the upper target net cash, the Zafgen valuation will be increased by the difference between the closing Zafgen net cash and the target Zafgen net cash, resulting in a corresponding adjustment to the exchange ratio and a decrease to the ownership percentage of Holdings in the combined company. In addition, the target Zafgen net cash and lower target net cash and upper target net cash amounts will be reduced by $21,311 per day beginning on March 31, 2020 through the closing date of the merger, and the Chondrial valuation will be increased by $111,656 per day beginning on March 31, 2020 through the closing date of the merger, resulting in a corresponding adjustment to the exchange ratio and an increase to the ownership percentage of Holdings in the combined company.

Without giving effect to the proposed reverse stock split of Zafgen common stock described elsewhere in this proxy statement, and based on the foregoing percentages as of a March 31, 2020 closing, the exchange ratio for the Chondrial common stock would be approximately 645,509.6444 shares of Zafgen common stock for each share of Chondrial common stock (approximately 64,550,964 total shares of Zafgen common stock would be issued to Chondrial’s stockholder, on a fully diluted basis). There will be no adjustment to the number of shares of Zafgen common stock to be issued to Chondrial’s stockholder based on the market value of Zafgen common stock, and the market value of Zafgen common stock may vary significantly from the market value as of the date



 

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of this proxy statement. Because Zafgen’s net cash will not be determined until prior to the closing, and because the number of shares of Zafgen common stock issuable to Chondrial’s stockholder is determined based on Zafgen’s net cash balance prior to closing, Zafgen stockholders cannot be certain of the exact number of shares of Zafgen common stock that will be issued to Chondrial’s stockholder when Zafgen stockholders vote on the proposals at the annual meeting.

Equity Awards

Prior to the closing of the merger, the Zafgen Board will adopt appropriate resolutions and take all other actions necessary and appropriate to provide that the vesting of each unexpired, unexercised and unvested option to purchase Zafgen common stock (referred to as “Zafgen options”) held by a non-employee member of the Zafgen Board will be accelerated in full effective as of immediately prior to the effective time of the merger. The number of shares of common stock underlying such options and the exercise price for such options will be adjusted to account for the reverse stock split. The Zafgen Amended and Restated 2006 Stock Option Plan and the Zafgen 2014 Stock Option and Incentive Plan (referred to as the “Zafgen Stock Plans”) shall remain in effect and each unexpired, unexercised Zafgen option shall continue to remain outstanding after the effective time of the merger.

Prior to the closing of the merger, the Zafgen Board will adopt appropriate resolutions and take all other actions necessary and appropriate to provide that (i) the vesting of each outstanding unvested equity award with respect to Zafgen common stock that represents the right to receive in the future shares of Zafgen common stock pursuant to any Zafgen Stock Plan (referred to as “Zafgen RSUs”) held by any non-employee member of the Zafgen Board will be accelerated in full effective as of immediately prior to the effective time of the merger and (ii) each outstanding unsettled Zafgen RSU (including any Zafgen RSUs that are accelerated as stated above or upon termination of employment as discussed below) will be settled and each holder shall receive, immediately prior to the effective time of the merger a number of shares of Zafgen common stock equal to the number of vested and unsettled restricted stock units underlying such Zafgen RSU. The number of shares of common stock underlying such options and the exercise price for such options will be adjusted to account for the reverse stock split. The Zafgen Stock Plans shall remain in effect and each unexpired, unexercised Zafgen option shall continue to remain outstanding after the effective time of the merger.

Prior to the closing of the merger, unless otherwise determined by the parties, Zafgen will use commercially reasonable efforts to provide fully executed original separation agreements with each Zafgen employee. Zafgen and Chondrial shall cause Zafgen to comply with the terms of any employment, severance, retention, change of control, or similar agreement with the Zafgen employees, including with respect to the acceleration of any Zafgen options and Zafgen RSUs held by the Zafgen employees.

Pursuant to the merger agreement, at the effective time of the merger, each option to purchase units of Holdings (referred to as “Holdings options”) that is outstanding and unexercised immediately prior to the effective time of the merger issued under the Chondrial Therapeutics Holdings, LLC 2016 Equity Incentive Plan (referred to as the “Holdings Plan”), whether or not vested, shall be substituted for a Zafgen option, and Zafgen shall take all necessary steps to effectuate such substitution. From and after the effective time of the merger, (i) each substituted Holdings option may be exercised solely for shares of Zafgen common stock, (ii) the number of shares of Zafgen common stock subject to each Holdings option assumed by Zafgen shall be determined by multiplying (A) the number of Holdings units that were subject to such Holdings option, as in effect prior to the effective time of the merger, by (B) the total number of outstanding shares of Chondrial common stock (on a fully diluted basis), as in effect prior to the effective time of the merger, by (C) a fraction, the numerator of which is one and the denominator of which is the fully diluted number of Holdings units as of such time (assuming conversion of all classes of units of Holdings into common units of Holdings, and including common units underlying all Holdings options), by (D) the Exchange Ratio (as defined in the merger agreement), and rounding



 

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the resulting number down to the nearest whole number of shares of Zafgen common stock. The per share exercise price for shares of Zafgen common stock issuable upon exercise of each Holdings option assumed by Zafgen shall be determined by multiplying (A) the fair market value of a share of Zafgen common stock at the effective time of the merger (as determined under the applicable Zafgen Stock Plan) by (B) a fraction, the numerator of which is the per unit exercise price of Holdings units subject to such Holdings option, as in effect immediately prior to the effective time of the merger agreement, and the denominator of which is the fair market value of a Holdings unit immediately prior to the effective time of the merger, and rounding the resulting exercise price up to the nearest whole cent (subject to adjustment to the extent necessary to ensure that the excess of the aggregate fair market value of the shares of Zafgen common stock issuable upon exercise of each substituted Zafgen option immediately after such substitution over the aggregate exercise price with respect to the shares of Zafgen common stock subject to such Zafgen option is not greater than the excess of the aggregate fair market value of the common units of Holdings subject to the Holdings option immediately before the substitution over the aggregate exercise price with respect to such common units of Holdings subject to such Holdings option). Any restriction on the exercise of any substituted Holdings option will continue in full force and effect and the term, exercisability, vesting schedule and other provisions of such Holdings option shall otherwise remain unchanged.

Conditions to the Completion of the Merger

To consummate the merger, Zafgen’s stockholders must approve the issuance of shares of Zafgen common stock in the merger, and an amendment to the ninth amended and restated certificate of incorporation of Zafgen effecting the reverse stock split. In addition to obtaining such Zafgen stockholder approvals and appropriate regulatory approvals, the merger agreement includes a termination right for Chondrial based upon Zafgen having a minimum net cash amount of at least $30,000,000 and a termination right for Zafgen based upon Chondrial having a minimum net cash amount of not less than zero. Additionally, each of the other closing conditions set forth in the merger agreement and described in the section titled “The Merger Agreement – Conditions to the Completion of the Merger” must be satisfied or waived.

No Solicitation

Each of Zafgen and Chondrial agreed that, except as described below, from the date of the merger agreement until the earlier of the consummation of the merger or the termination of the merger agreement in accordance with its terms, Zafgen and Chondrial and any of their respective subsidiaries will not, nor will either party or any of its subsidiaries authorize any of the directors, officers, employees, agents, attorneys, accountants, investment bankers, advisors or representatives retained by it or any of its subsidiaries to, directly or indirectly:

 

   

solicit, initiate or knowingly encourage, induce or facilitate the communication, making, submission or announcement of, any “acquisition proposal” (as defined in the section titled “The Merger Agreement—No Solicitation” below), or “acquisition inquiry” (as defined in the section titled “The Merger Agreement—No Solicitation” below);

 

   

furnish any non-public information with respect to it to any person in connection with or in response to an acquisition proposal or acquisition inquiry;

 

   

engage in discussions or negotiations with any person with respect to any acquisition proposal or acquisition inquiry;

 

   

approve, endorse or recommend an acquisition proposal; or

 

   

execute or enter into any letter of intent or similar document or any contract contemplating or otherwise relating to an acquisition transaction (as defined in the section titled “The Merger Agreement—No Solicitation” below).



 

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Termination of the Merger Agreement

Either Zafgen or Chondrial can terminate the merger agreement under specified circumstances, which would prevent the merger from being consummated.

Termination Fee

The merger agreement provides for the payment of a termination fee of $3,375,000 by each of Zafgen and Chondrial to the other party upon termination of the merger agreement under specified circumstances.

Expense Reimbursement

The merger agreement provides for the payment of an expense reimbursement of $350,000 by each of Zafgen and Chondrial to the other party upon termination of the merger agreement under specified circumstances.

NASDAQ Listing

Pursuant to the merger agreement, Zafgen agreed to use its reasonable best efforts to cause the shares of Zafgen common stock being issued in the merger to be approved for listing on NASDAQ at or prior to the effective time of the merger.

Voting Agreements

Concurrently with the execution of the merger agreement, certain Zafgen stockholders, owning in the aggregate approximately 9.7% of the outstanding shares of Zafgen common stock entered into voting agreements with Zafgen and Chondrial. The voting agreements provide, among other things, that the parties to the voting agreements will vote the shares of Zafgen common stock held by them in favor of the transactions contemplated by the merger agreement and grant a proxy to vote such shares in favor of the transactions. In addition, the voting agreements place restrictions on the transfer of the shares of Zafgen common stock held by the respective signatory stockholders.

In addition, Chondrial’s sole stockholder, Holdings, has already approved the merger.

Lock-up Agreements

Concurrently with the execution of the merger agreement, certain Zafgen stockholders, owning in the aggregate approximately 9.7% of the outstanding shares of Zafgen common stock, and Holdings, the sole stockholder of Chondrial, entered into lock-up agreements with Zafgen, pursuant to which such parties have agreed not to, except in limited circumstances, sell or transfer, or engage in swap or similar transactions with respect to, shares of Zafgen common stock, including, as applicable, shares received in the merger and issuable upon exercise of certain warrants and options, from the closing of the merger until 180 days from the closing date of the merger. Pursuant to the merger agreement, certain members of Holdings will execute lock-up agreements at the closing of the merger.

Management Following the Merger

At the effective time of the merger, the executive management team of the combined company is expected to include the following individuals:

 

Name

  

Position with the Combined Company

  

Current Position with Chondrial

Carole S. Ben-Maimon, M.D.    President and Chief Executive Officer    President and Chief Executive Officer
John Berman    Vice President, Finance and Operations and Treasurer    Vice President Finance and Operations and Treasurer


 

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At the effective time of the merger, the executive management team of the combined company is also expected to include a chief financial officer and a chief medical officer.

The Board of Directors Following the Merger

At the effective time of the merger, the combined company will initially have a seven member board of directors, comprised of Peter Barrett, Ph.D., Carole Ben-Maimon, M.D., Thomas O. Daniel, M.D., Tom Hamilton, Jonathan Leff, Frank E. Thomas, and one additional designee of Deerfield Management (until each of their respective successors are duly elected or appointed and qualified or their earlier death, resignation or removal).

Interests of Zafgen’s Directors and Executive Officers in the Merger

Zafgen’s directors and executive officers have economic interests in the merger that are different from, or in addition to, those of Zafgen stockholders generally. These interests include:

 

   

Zafgen’s executive officers are parties to Severance and Change in Control Agreements, which were effective on or prior to September 12, 2019, that provide for severance benefits, including accelerated vesting of outstanding equity awards and extended exercise periods of outstanding stock options, in the event of certain qualifying terminations of employment in connection with the merger;

 

   

Zafgen’s executive officers will receive cash retention bonuses, which were approved on or prior to September 12, 2019, in connection with the merger;

 

   

Zafgen’s executive officers are parties to employment agreements or offer letters that provide for severance benefits, including accelerated vesting of outstanding equity awards, in the event of certain qualifying terminations of employment following the merger; and

 

   

Zafgen’s directors and executive officers are entitled to continued indemnification and insurance coverage under indemnification agreements and the merger agreement.

These interests are discussed in more detail in the section entitled “The Merger—Interests of Zafgen’s Directors and Executive Officers in the Merger” beginning on page [●]. The Zafgen Board was aware of and considered these interests, among other matters, in reaching its decision to approve and declare advisable the merger agreement, the merger and the other transactions contemplated by the merger agreement.

Federal Securities Law Consequences; Resale Restrictions

The issuance of Zafgen common stock in the merger to Chondrial’s stockholder will be effected by means of a private placement, which is exempt from registration under the Securities Act of 1933, as amended (referred to as the “Securities Act”), in reliance on Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D or Regulation S promulgated thereunder and such shares will be “restricted securities.” The shares issued in connection with the merger will not be registered under the Securities Act upon issuance and will not be freely transferable. Holders of such shares may not sell their respective shares unless the shares are registered under the Securities Act or an exemption is available under the Securities Act. Additionally, the shares of Zafgen common stock issued in the merger to Chondrial’s stockholder will be subject to the resale restrictions under the lock-up agreements, as further described in the section entitled “Agreements Related To The Merger” beginning on page [●] of this proxy statement.

Material U.S. Federal Income Tax Consequences of the Merger

The merger has been structured to qualify as a reorganization within the meaning of Section 368(a) of the Code. Zafgen stockholders will not sell, exchange or dispose of any shares of Zafgen common stock as a result of



 

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the merger. Thus, there will be no material U.S. federal income tax consequences to Zafgen or its stockholders as a result of the merger.

Risk Factors

The merger, including the possibility that the merger may not be consummated, poses a number of risks to Zafgen and its stockholders. In addition, both Zafgen and Chondrial are subject to various risks associated with their businesses and their industries, and the combined company will also be subject to those and other risks.

Regulatory Approvals

Neither Zafgen nor Chondrial is required to make any filings or to obtain approvals or clearances from any antitrust regulatory authorities in the United States or other countries to consummate the merger. In the United States, Zafgen must comply with applicable federal and state securities laws and the NASDAQ rules in connection with the issuance of shares of Zafgen common stock in the merger and the private placement, including the filing with the SEC of this proxy statement.

Anticipated Accounting Treatment

The merger will be treated by Zafgen as a reverse merger under the purchase method of accounting in accordance with U.S. generally accepted accounting principles (referred to as “GAAP”). For accounting purposes, Chondrial is considered to be acquiring Zafgen in this transaction.

Appraisal Rights

Neither Zafgen’s stockholders nor Chondrial’s stockholder is entitled to appraisal rights in connection with the merger.

Potential Financing

Although there is no current agreement in place with any potential financing source, nor any requirement to undertake a financing, under the merger agreement, concurrently with the consummation of the merger, the combined company may complete a financing transaction in which Larimar may issue, in a single transaction or a series of transactions shares of the common stock, or securities convertible or exercisable into common stock, of Larimar. To the extent any such potential financing is consummated, the issuance of shares would be dilutive to both Zafgen and Chondrial stockholders, after giving effect to the exchange ratio, and shares issued in connection with such potential financing would not be used in the calculation of the exchange ratio. Any potential financing after the effective time of the merger must be approved by the majority of the members of the combined company’s board of directors.



 

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SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA

The following tables present summary historical financial data for each of Zafgen and Chondrial, summary unaudited pro forma condensed combined financial data for Zafgen and Chondrial and comparative historical and unaudited pro forma per share data for Zafgen and Chondrial. The following information does not give effect to the proposed reverse stock split.

Selected Historical Consolidated Financial Data of Zafgen

The following table summarizes Zafgen’s consolidated financial data. Zafgen derived the following consolidated statements of operations data for the years ended December 31, 2019 and 2018 and the consolidated balance sheet data as of December 31, 2019 and 2018 from its audited consolidated financial statements and related notes, included in Zafgen’s Annual Report on Form 10-K for the year ended December 31, 2019 and incorporated by reference herein. Zafgen derived the following consolidated statements of operations data for the years ended December 31, 2017, 2016 and 2015 and the consolidated balance sheet data as of December 31, 2017, 2016 and 2015 from its audited consolidated financial statements and related notes not included or incorporated in this proxy statement. The following selected financial data have been derived from Zafgen’s consolidated financial statements and should be read in conjunction with “Zafgen’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this proxy statement or incorporated by reference herein. Zafgen’s historical results are not necessarily indicative of the results that may be expected in any future period.

 

    Year Ended December 31,  
    2019     2018     2017     2016     2015  
    (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

         

Revenue

  $ —       $ —       $ —       $ —       $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Research and development

    23,886       47,929       40,839       39,936       54,618  

General and administrative

    16,215       13,193       12,160       18,289       19,195  

Restructuring charges

    5,553       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    45,654       61,122       52,999       58,225       73,813  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (45,654     (61,122     (52,999     (58,225     (73,813
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

         

Interest income

    1,989       1,889       996       894       438  

Interest expense

    (1,766     (1,898     (165     (529     (806

Foreign currency transaction gains (losses), net

    25       (237     140       (18     (105
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

    248       (246     971       347       (473
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (45,406     (61,368     (52,028     (57,878     (74,286
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share—basic and diluted

  $ (1.22   $ (1.90   $ (1.90   $ (2.12   $ (2.78
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding, basic and diluted

    37,347,199       32,228,721       27,433,239       27,297,934       26,756,079  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     December 31,  
     2019     2018     2017     2016     2015  
     (in thousands)  

Consolidated Balance Sheet Data:

          

Cash, cash equivalents and marketable securities

   $ 70,261     $ 118,066     $ 102,052     $ 129,194     $ 185,079  

Working capital (1)

     59,313       108,024       97,632       121,005       171,567  

Total assets

     80,734       121,762       105,510       131,621       189,106  

Notes payable, net of discount, long-term

     8,464       15,185       20,000       —         3,453  

Total liabilities

     27,110       28,491       27,293       9,984       19,996  

Accumulated deficit

     (396,351     (350,945     (289,577     (237,549     (179,671

Total stockholders’ equity

     53,624       93,271       78,217       121,727       169,110  

 

(1)

Zafgen defines working capital as current assets less current liabilities

Selected Historical Financial Data of Chondrial

The following table summarizes Chondrial’s consolidated financial data. Chondrial has derived the statements of operations data for the years ended December 31, 2019 and 2018 and the balance sheet data as of December 31, 2019 and 2018 from Chondrial’s consolidated audited financial statements included elsewhere in this proxy statement. You should read the following selected financial data together with Chondrial’s consolidated financial statements and the related notes appearing at the end of this proxy statement and “Chondrial’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page [●] of this proxy statement. Chondrial’s historical results are not necessarily indicative of the results that may be expected in any future period.

 

     Year Ended December 31,  
     2019      2018  
     (in thousands, except share and
per share data)
 

Consolidated Statement of Operations Data:

 

Revenue

   $ —        $ —    
  

 

 

    

 

 

 

Operating expenses:

     

Research and development

     20,790        9,609  

General and administrative

     2,424        1,583  
  

 

 

    

 

 

 

Total operating expenses

     23,214        11,192  
  

 

 

    

 

 

 

Loss from operations

     (23,214      (11,192
  

 

 

    

 

 

 

Other income

     82        —    

Net loss

     (23,132      (11,192
  

 

 

    

 

 

 

Net loss per share—basic and diluted

   $ (231,320.00    $ (111,920.00
  

 

 

    

 

 

 

Weighted average common shares outstanding, basic and diluted

     100        100  
  

 

 

    

 

 

 

 

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     December 31,  
     2019      2018  
     (in thousands)  

Consolidated Balance Sheet Data:

     

Cash

   $ 1,009      $ 4,356  

Working (deficit) capital (1)

     (1,145      2,619  

Total assets

     5,201        5,147  

Total liabilities

     5,895        2,233  

Accumulated deficit

     (23,132      —    

Total stockholder’s (deficit) equity

     (694      2,914  

 

(1)

Chondrial defines working (deficit) capital as current assets less current liabilities

Selected Unaudited Pro Forma Combined Financial Data of Zafgen and Chondrial

The following selected unaudited pro forma combined financial data presents the pro forma financial position and results of operations of the combined business based on the historical financial statements of Zafgen and Chondrial, after giving effect to the merger. The unaudited pro forma combined balance sheet data as of December 31, 2019 gives effect to the merger as if it took place on December 31, 2019. The unaudited pro forma combined statement of operations data for the year ended December 31, 2019 gives effect to the merger as if it took place on January 1, 2019.

In the unaudited pro forma combined financial data, the merger has been accounted for as an asset acquisition, with Chondrial being the accounting acquirer. Using the estimated total consideration for the merger, management has preliminarily allocated such consideration to the assets acquired and liabilities assumed of Zafgen in the merger based on a preliminary valuation analysis and purchase price allocation. This preliminary purchase price allocation was used to prepare pro forma adjustments in the unaudited pro forma combined financial statements. The final purchase price allocation will be determined when management has determined the final consideration paid in the merger and completed the detailed valuations and necessary calculations. The final purchase price allocation could differ materially from the preliminary purchase price allocation used to prepare the pro forma adjustments and the unaudited pro forma combined financial statements. The final purchase price allocation may (i) include changes to assets and liabilities included in the pro forma combined financial data and (ii) include changes to the fair value of purchase consideration in the merger.

The unaudited pro forma combined financial statements were prepared in accordance with Article 11 of SEC Regulation S-X. Accordingly, the historical consolidated financial data of Zafgen and Chondrial has been adjusted to give pro forma effect to events that are (i) directly attributable to the merger, (ii) factually supportable, and (iii) with respect to the unaudited pro forma combined statement of operations, expected to have a continuing impact on the results of operations of the combined company. In addition, the pro forma adjustments reflecting the completion of the merger are based upon the application of the asset acquisition method of accounting in accordance with GAAP and upon the assumptions set forth in the unaudited pro forma combined financial statements.

The unaudited pro forma combined financial information has been prepared for illustrative purposes only and is not necessarily indicative of the financial position or results of operations in future periods or the results that actually would have been realized had Zafgen and Chondrial been a combined company during the specified periods.

The following selected unaudited pro forma combined financial data should be read in conjunction with the section entitled “Unaudited Pro Forma Combined Financial Statements,” beginning on page [●], Zafgen’s audited consolidated financial statements and the notes thereto included to in the section entitled “Zafgen’s Audited Consolidated Financial Statements” in this proxy statement, Chondrial’s consolidated audited financial

 

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statements and the notes thereto included in the sections entitled “Chondrial’s Audited Consolidated Financial Statements” and “Notes to Chondrial’s Audited Consolidated Financial Statements,” respectively, the sections entitled “Zafgen’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page [●], and “Chondrial’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page [●], and the other information contained in this proxy statement.

The following information does not give effect to the proposed reverse stock split of Zafgen common stock described in the section entitled “Matters Being Submitted to a Vote of Zafgen’s Stockholders—Proposal 2: Approval of the Reverse Stock Split,” beginning on page [●] of this proxy statement.

 

     Year Ended  
     December 31, 2019  
     (in thousands, except per share data)  

Combined Statement of Operations Data:

  

Revenue

   $ —    
  

 

 

 

Operating expenses:

  

Research and development

     44,676  

General and administrative

     17,218  

Restructuring charges

     5,553  
  

 

 

 

Total operating expenses

     67,447  
  

 

 

 

Loss from operations

     (67,447
  

 

 

 

Other income (expense):

  

Interest income

     1,989  

Interest expense

     (37

Other income

     82  

Foreign currency transaction losses, net

     25  
  

 

 

 

Total other income (expense), net

     2,059  
  

 

 

 

Net loss

   $ (65,388
  

 

 

 

Net loss per share, basic and diluted

   $ (0.65
  

 

 

 

Weighted average common shares outstanding, basic and diluted

     101,221,965  
  

 

 

 

 

     As of December 31, 2019  
     (in thousands)  

Combined Balance Sheet Data:

  

Cash, cash equivalents and marketable securities

   $ 46,871  

Working capital (1)

     40,565  

Total assets

     53,245  

Total liabilities

     17,391  

Accumulated deficit

     (23,132

Total stockholders’ equity

     35,854  

 

(1)

Zafgen and Chondrial define working capital as current assets less current liabilities

Comparative Historical and Unaudited Pro Forma Per Share Data

The information below reflects historical per share information for Zafgen and Chondrial and unaudited pro forma per share information of the combined company as if Zafgen and Chondrial had been combined as of or for the periods presented. The per share amounts below do not give effect to the proposed reverse stock split of Zafgen common stock described in the section entitled “Matters Being Submitted to a Vote of Zafgen’s Stockholders—Proposal 2: Approval of the Reverse Stock Split,” beginning on page [●] of this proxy statement.

 

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The pro forma amounts in the table below have been derived from the unaudited pro forma combined financial information included in the section entitled “Unaudited Pro Forma Combined Financial Statements,” beginning on page [●] of this proxy statement. The pro forma amounts are presented for illustrative purposes only and are not necessarily indicative of what the financial position or the results of operations of the combined company would have been had Zafgen and Chondrial been combined as of or for the periods presented.

The information below should be read in conjunction with the audited consolidated financial statements of Zafgen and the related notes, the audited consolidated financial statements of Chondrial and the related notes, and the unaudited pro forma combined financial information and the related notes, all of which are included elsewhere in this proxy statement or in annexes to this proxy statement or incorporated by reference herein.

 

     As of and for
the Year Ended
December 31, 2019
 
     (in thousands)  

Zafgen

  

Book value per share—historical (1)

   $ 1.43  

Basic and diluted net loss per share—historical

   $ (1.22

Cash dividends declared per share—historical

   $ —    

Chondrial

  

Book value per share—historical (1)

   $ (6,940.00

Basic and diluted net loss per share—historical

   $ (231,320.00

Cash dividends declared per share—historical

   $ —    

Chondrial Unaudited Pro Forma Equivalent Data per Share (2)

  

Book value per share—pro forma

   $ (0.01

Basic and diluted net loss per share—historical

   $ (0.36

Cash dividends declared per share—pro forma

   $ —    

Unaudited Pro Forma Combined

  

Book value per share—pro forma (3)

   $ 0.35  

Basic and diluted net loss per share—pro forma

   $ (0.65

Cash dividends declared per share—pro forma

   $ —    

 

(1)

Historical book value per share is calculated by taking total shareholders’ equity divided by total outstanding common shares, as of the end of the period.

(2)

Chondrial Unaudited Pro Forma Equivalent Data per share is calculated by applying the preliminary pro forma share exchange ratio of 638,340 to the unaudited pro forma per share data.

(3)

Combined pro forma book value per share is calculated by taking pro forma combined total shareholder equity divided by pro forma combined total outstanding common shares.

 

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MARKET PRICE AND DIVIDEND INFORMATION

Zafgen common stock began trading on NASDAQ under the symbol “ZFGN” on June 18, 2014. Chondrial is a private company and its common stock is not publicly traded. There has never been, nor is there expected to be in the future, a public market for Chondrial common stock.

On December 17, 2019, the last full trading day prior to the public announcement of the proposed merger, the closing price per share of Zafgen common stock as reported on NASDAQ was $0.83 per share. On [●], 2020, the last practicable date before the printing of this proxy statement, the closing price per share of Zafgen common stock as reported on NASDAQ was $[●], per share.

Following the consummation of the merger, and subject to successful application for initial listing with NASDAQ, Zafgen common stock will continue to be listed on NASDAQ, but will trade under the symbol “LRMR” and under the combined company’s new name, “Larimar Therapeutics, Inc.” (referred to as “Larimar”).

As of the record date, Zafgen had approximately [●] stockholders of record.

Zafgen has never declared or paid cash dividends on Zafgen common stock. Zafgen currently anticipates that all of its earnings in the foreseeable future will be used for the operation and growth of its business, and does not expect to pay any cash dividends to Zafgen stockholders. Payment of future dividends, if any, will be at the discretion of the Zafgen Board.

 

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RISK FACTORS

You should consider the following factors in evaluating whether to approve the issuance of shares of Zafgen common stock in the merger and the resulting “change of control” of Zafgen under the NASDAQ rules and the amendment to Zafgen’s ninth amended and restated certificate of incorporation to effect a reverse stock split of Zafgen common stock. These factors should be considered in conjunction with the other information included or incorporated by reference by Zafgen in this proxy statement.

Risks Related to the Merger

If the proposed merger with Chondrial is not consummated, Zafgen’s business could suffer materially and Zafgen’s stock price could decline.

The consummation of the proposed merger with Chondrial is subject to a number of closing conditions, including the approval by Zafgen’s stockholders, approval by NASDAQ of Zafgen’s application for initial listing of Zafgen common stock in connection with the merger, and other customary closing conditions. Zafgen is targeting a closing of the transaction in the second quarter of 2020.

If the proposed merger is not consummated, Zafgen may be subject to a number of material risks, and its business and stock price could be adversely affected, as follows:

 

   

Zafgen has incurred and expects to continue to incur significant expenses related to the proposed merger with Chondrial even if the merger is not consummated.

 

   

The merger agreement contains covenants relating to Zafgen’s solicitation of competing acquisition proposals and the conduct of Zafgen’s business between the date of signing the merger agreement and the closing of the merger. As a result, significant business decisions and transactions before the closing of the merger require the consent of Chondrial. Accordingly, Zafgen may be unable to pursue business opportunities that would otherwise be in its best interest as a standalone company. If the merger agreement is terminated after Zafgen has invested significant time and resources in the transaction process, Zafgen will have a limited ability to continue its current operations without obtaining additional financing to fund its operations.

 

   

Zafgen could be obligated to pay Chondrial a $3,375,000 termination fee in connection with the termination of the merger agreement, depending on the reason for the termination.

 

   

Zafgen could be obligated to pay Chondrial a $350,000 expense reimbursement in connection with the termination of the merger agreement, depending on the reason for the termination.

 

   

Zafgen’s collaborators and other business partners and investors in general may view the failure to consummate the merger as a poor reflection on its business or prospects.

 

   

Some of Zafgen’s suppliers, collaborators and other business partners may seek to change or terminate their relationships with Zafgen as a result of the proposed merger.

 

   

As a result of the proposed merger, current and prospective employees could experience uncertainty about their future roles within the combined company. This uncertainty may adversely affect Zafgen’s ability to retain its key employees, who may seek other employment opportunities. Additionally, pursuant to the merger agreement, all Zafgen employees will be terminated effective as of the closing.

 

   

Zafgen’s management team may be distracted from day to day operations as a result of the proposed merger.

 

   

The market price of Zafgen common stock may decline to the extent that the current market price reflects a market assumption that the proposed merger will be completed.

In addition, if the merger agreement is terminated and the Zafgen Board determines to seek another business combination, it may not be able to find a third party willing to provide equivalent or more attractive consideration

 

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than the consideration to be provided by each party in the merger. In such circumstances, the Zafgen Board may elect to, among other things, divest all or a portion of Zafgen’s business, or take the steps necessary to liquidate all of Zafgen’s business and assets, and in either such case, the consideration that Zafgen receives may be less attractive than the consideration to be received by Zafgen pursuant to the merger agreement.

If Zafgen does not successfully consummate the merger or another strategic transaction, the Zafgen Board may decide to pursue a dissolution and liquidation of Zafgen. In such an event, the amount of cash available for distribution to Zafgen’s stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.

There can be no assurance that the merger will be completed. If the merger is not completed, the Zafgen Board may decide to pursue a dissolution and liquidation of Zafgen. In such an event, the amount of cash available for distribution to Zafgen’s stockholders will depend heavily on the timing of such decision and, as with the passage of time the amount of cash available for distribution will be reduced as Zafgen continues to fund its operations. In addition, if the Zafgen Board were to approve and recommend, and Zafgen’s stockholders were to approve, a dissolution and liquidation of Zafgen, Zafgen would be required under Delaware corporate law to pay its outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to Zafgen’s stockholders. As a result of this requirement, a portion of Zafgen’s assets may need to be reserved pending the resolution of such obligations, and the timing of any such resolution is uncertain. In addition, Zafgen may be subject to litigation or other claims related to a dissolution and liquidation of Zafgen. If a dissolution and liquidation were pursued, the Zafgen Board, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of Zafgen common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of Zafgen.

The amount of merger consideration may vary depending on the amount of net cash of Zafgen as of a certain determination date prior to closing and the date on which the closing occurs, which could result in Zafgen’s stockholders owning a smaller percentage of the combined company than expected.

Under the terms of the merger agreement, the number of shares of Zafgen common stock to be issued to Chondrial’s stockholder at the closing of the merger will be determined based on an exchange ratio, which will be calculated based on the total number of outstanding shares of Zafgen common stock and Chondrial common stock, each on a fully-diluted basis, and the respective valuations of Chondrial and Zafgen, as of immediately prior to the closing of the merger. If the closing occurs on or before March 31, 2020 and there is no adjustment to the closing valuation of Zafgen (as described below), then immediately following the effective time of the merger, Chondrial’s stockholder will own, or hold rights to acquire, 60% of the common stock of the combined company, on a fully-diluted basis, and Zafgen’s existing stockholders will own or hold rights to acquire 40% of the common stock of the combined company, on a fully-diluted basis. The respective valuations of Chondrial and Zafgen, and the corresponding ownership percentages of Chondrial’s stockholder and existing Zafgen stockholders, may be adjusted upward or downward based on the date the closing occurs and the net cash balance (defined in the merger agreement as cash, cash equivalents and marketable securities minus certain outstanding liabilities) of Zafgen as of a determination date prior to the closing of the merger, and as a result, either Zafgen’s stockholders could own less of the combined company than expected. There can be no assurances as to Zafgen’s level of net cash between now and closing or as to the date the closing will occur.

Zafgen’s net cash may be less than $30,000,000 at the closing of the merger, which would cause a condition to Chondrial’s obligation to consummate the merger to fail to be satisfied and may result in the termination of the merger agreement.

Zafgen is required to have a net cash balance of at least $30,000,000 at the closing of the merger as a condition to Chondrial’s obligation to consummate the merger. For purposes of the merger agreement, net cash is subject to certain reductions, including, without limitation, accounts payable, accrued expenses (except those

 

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related to the merger), current liabilities payable in cash, unpaid expenses related to the merger and certain other unpaid obligations, including outstanding lease obligations. The liability with regards to the Company’s outstanding lease obligations is a large component of Zafgen’s net cash and COVID-19 has created uncertainties surrounding the Company’s ability to take the steps necessary to sublease or negotiate a buy-out of its existing leases. In the event that Zafgen’s net cash falls below this threshold, a condition to the Chondrial’s obligation to consummate the merger will fail to be satisfied and Chondrial will have the right to terminate the merger agreement at an outside date of September 17, 2020 (subject to extension as provided in the merger agreement) if Zafgen’s net cash continues to be lower than the $30,000,000 threshold.

Some of Zafgen’s officers and directors have conflicts of interest that may influence them to support or approve the merger.

Officers and directors of Zafgen participate in arrangements that provide them with interests in the merger that are different from yours, including, among others, their continued service as a director of the combined company, retention and severance benefits, the acceleration of restricted stock and option vesting and continued indemnification. These interests, among others, may influence the officers and directors of Zafgen to support or approve the merger. For a more detailed discussion see “The Merger—Interests of Zafgen’s Directors and Executive Officers in the Merger” beginning on page [●] of this proxy statement.

The merger may be completed even though material adverse changes may result from the announcement of the merger, industry-wide changes and other causes.

In general, either party can refuse to complete the merger if there is a material adverse change affecting the other party between December 17, 2019, the date of the merger agreement, and the closing. However, some types of changes do not permit either party to refuse to complete the merger, even if such changes would have a material adverse effect on Zafgen or Chondrial, to the extent they resulted from the following and do not have a materially disproportionate effect on Zafgen or Chondrial, as the case may be:

 

   

the announcement or pendency of the merger agreement or the transactions contemplated thereby;

 

   

the taking of any action, or the failure to take any action, by any party that is required to comply with the terms of the merger agreement;

 

   

any natural disaster or any act or threat of terrorism or war anywhere in the world, any armed hostilities or terrorist activities anywhere in the world, any threat or escalation or armed hostilities or terrorist activities anywhere in the world or any governmental or other response or reaction to any of the foregoing;

 

   

any change in generally accepted accounting principles or any change in applicable laws, rules or regulations or the interpretation thereof;

 

   

general economic or political conditions or conditions generally affecting the industries in which either party and its subsidiaries operate;

 

   

with respect to Zafgen, any change in the stock price or trading volume of Zafgen common stock;

 

   

with respect to Zafgen, subject to certain exceptions, a change in the listing status of Zafgen common stock on NASDAQ; or

 

   

with respect to Chondrial, any change in the cash position of Chondrial or its subsidiaries which results from operations in the ordinary course of business.

If adverse changes occur but Zafgen and Chondrial must still complete the merger, the combined company’s stock price may suffer.

 

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The market price of the combined company’s common stock may decline as a result of the merger.

The market price of the combined company’s common stock may decline as a result of the merger for a number of reasons including if:

 

   

the combined company does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts;

 

   

the effect of the merger on the combined company’s business and prospects is not consistent with the expectations of financial or industry analysts; or

 

   

investors react negatively to the effect on the combined company’s business and prospects from the merger.

Zafgen’s stockholders may not realize a benefit from the merger commensurate with the ownership dilution they will experience in connection with the merger.

If the combined company is unable to realize the strategic and financial benefits currently anticipated from the merger, Zafgen’s stockholders will have experienced substantial dilution of their ownership interest without receiving any commensurate benefit. Significant management attention and resources will be required to integrate the two companies. Delays in this process could adversely affect the combined company’s business, financial results, financial condition and stock price following the merger.

During the pendency of the merger, Zafgen or Chondrial may not be able to enter into a business combination with another party and will be subject to contractual limitations on certain actions because of restrictions in the merger agreement.

Covenants in the merger agreement impede the ability of Zafgen or Chondrial to make acquisitions or complete other transactions that are not in the ordinary course of business pending completion of the merger. As a result, if the merger is not completed, the parties may be at a disadvantage to their competitors. In addition, while the merger agreement is in effect and subject to limited exceptions, each party is prohibited from soliciting, initiating, encouraging or taking actions designed to facilitate any inquiries or the making of any proposal or offer that could lead to the entering into certain extraordinary transactions with any third party, such as a sale of assets, an acquisition of Zafgen common stock, a tender offer for Zafgen common stock, a merger or other business combination outside the ordinary course of business. Any such transactions could be favorable to such party’s stockholders.

Because the lack of a public market for Chondrial common stock makes it difficult to evaluate the fairness of the merger, Chondrial’s stockholder may receive consideration in the merger that is greater than or less than the fair market value of Chondrial common stock.

The outstanding share capital of Chondrial is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Chondrial. Since the percentage of Zafgen’s equity to be issued to Chondrial’s stockholder was determined based on negotiations between the parties, it is possible that the value of the Zafgen common stock to be issued in connection with the merger will be greater than the fair market value of Chondrial. Alternatively, it is possible that the value of the shares of Zafgen common stock to be issued in connection with the merger will be less than the fair market value of Chondrial.

The combined company will incur significant transaction costs as a result of the merger, including investment banking, legal and accounting fees. In addition, the combined company will incur significant consolidation and integration expenses which cannot be accurately estimated at this time. These costs could include the possible relocation of certain operations from Massachusetts to other offices of the combined company as well as costs associated with terminating existing office leases and the loss of benefits of certain favorable office leases. Actual transaction costs may substantially exceed Chondrial’s estimates and may have an adverse effect on the combined company’s financial condition and operating results.

 

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Failure of the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code could harm the combined company.

The parties intend for the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code, as amended. For a full description of the tax consequences of the merger, see “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page [●] of this proxy statement. To comply with the requirements for a Section 368(a) reorganization, certain structural and other requirements for the transaction must be met; if not satisfied, Chondrial’s stockholder could be subject to tax liability.

The merger is expected to result in a limitation on Zafgen’s ability to utilize its net operating loss carryforward.

Under Section 382 of the Code, use of Zafgen’s net operating loss carryforwards (referred to as “NOLs”) will be limited if Zafgen experiences an “ownership change.” For these purposes, an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Zafgen is expected to experience an ownership change as a result of the merger and therefore its ability to utilize its NOLs and certain credit carryforwards remaining at the effective time will be limited. The limitation will be determined by the fair market value of Zafgen common stock outstanding prior to the ownership change, multiplied by the applicable federal rate. Limitations imposed on Zafgen’s ability to utilize NOLs could cause U.S. federal and state income taxes to be paid earlier than would be paid if such limitations were not in effect and could cause such NOLs to expire unused, in each case reducing or eliminating the benefit of such NOLs.

Certain stockholders could attempt to influence changes within Zafgen which could adversely affect Zafgen’s operations, financial condition and the value of Zafgen common stock.

Zafgen’s stockholders may from time-to-time seek to acquire a controlling stake in Zafgen, engage in proxy solicitations, advance stockholder proposals or otherwise attempt to effect changes. Campaigns by stockholders to effect changes at publicly-traded companies are sometimes led by investors seeking to increase short-term stockholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases or sales of assets or the entire company. Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, and could disrupt Zafgen’s operations and divert the attention of the Zafgen Board and senior management from the pursuit of the proposed merger transaction. These actions could adversely affect Zafgen’s operations, financial condition, Zafgen’s ability to consummate the merger and the value of Zafgen common stock.

Zafgen and Chondrial may become involved in securities litigation or stockholder derivative litigation in connection with the merger, and this could divert the attention of Zafgen and Chondrial management and harm the combined company’s business, and insurance coverage may not be sufficient to cover all related costs and damages.

Securities litigation or stockholder derivative litigation frequently follows the announcement of certain significant business transactions, such as the sale of a business division or announcement of a business combination transaction. Zafgen and Chondrial may become involved in this type of litigation in connection with the merger, and the combined company may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect the business of Zafgen, Chondrial and the combined company.

 

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Failure to complete the merger may result in Zafgen and Chondrial paying a termination fee or expenses to the other party and could harm the price of Zafgen common stock and the future business and operations of each company.

If the merger is not completed and the merger agreement is terminated under certain circumstances, Zafgen or Chondrial may be required to pay the other party a termination fee of $3,375,000 and/or an expense reimbursement of up to $350,000. Even if a termination fee or expense reimbursement is not payable in connection with a termination of the merger agreement, each of Zafgen and Chondrial will have incurred significant fees and expenses, which must be paid whether or not the merger is completed. Further, if the merger is not completed, it could significantly harm the market price of Zafgen common stock.

The Exchange Ratio is not adjustable based on the market price of Zafgen common stock so the merger consideration at the closing may have greater or lesser value than the market price at the time the merger agreement was signed.

The merger agreement has set the Exchange Ratio (as defined in the merger agreement) for Chondrial common stock, and the Exchange Ratio (as defined in the merger agreement) is based on the outstanding Chondrial common stock and the outstanding Zafgen common stock, in each case immediately prior to the closing of the merger as described under the heading “The Merger—Merger Consideration.” Applying the exchange ratio formula in the merger agreement, Chondrial’s stockholder immediately before the merger is expected to own [●]% of the outstanding capital stock of Zafgen immediately following the merger, and the stockholders of Zafgen immediately before the merger are expected to own approximately [●]% of the outstanding capital stock of Zafgen immediately following merger, subject to certain assumptions. Under certain circumstances further described in the merger agreement, however, these ownership percentages may be adjusted upward or downward based on the date the closing occurs and the cash levels of the respective companies at the closing of the merger, and as a result, either Zafgen’s stockholders could own less of the combined company than expected.

Any changes in the market price of Zafgen common stock before the completion of the merger will not affect the number of shares of Zafgen common stock issuable to Chondrial’s stockholder pursuant to the merger agreement. Therefore, if before the completion of the merger the market price of Zafgen common stock declines from the market price on the date of the merger agreement, then Chondrial’s stockholder could receive merger consideration with substantially lower value than the value of such merger consideration on the date of the merger agreement. Similarly, if before the completion of the merger the market price of Zafgen common stock increases from the market price of Zafgen common stock on the date of the merger agreement, then Chondrial’s stockholder could receive merger consideration with substantially greater value than the value of such merger consideration on the date of the merger agreement. The merger agreement does not include a price-based termination right. Because the exchange ratio does not adjust as a result of changes in the market price of Zafgen common stock, for each one percentage point change in the market price of Zafgen common stock, there is a corresponding one percentage point rise or decline, respectively, in the value of the total merger consideration payable to Chondrial’s stockholder pursuant to the merger agreement.

Certain provisions of the merger agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the merger agreement.

The terms of the merger agreement prohibit each of Zafgen and Chondrial from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances when the Zafgen Board determines in good faith that an unsolicited alternative takeover proposal is or is reasonably likely to lead to a superior takeover proposal and that failure to cooperate with the proponent of the proposal would be reasonably likely to be inconsistent with the Zafgen Board’s fiduciary duties.

 

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If the conditions to the merger are not met, the merger may not occur.

Even if the share issuance and reverse stock split are approved by Zafgen’s stockholders, specified conditions must be satisfied or waived to complete the merger. These conditions are set forth in the merger agreement and described in the section entitled “The Merger Agreement—Conditions to the Completion of the Merger”. Zafgen cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the merger will not occur or will be delayed, and Zafgen and Chondrial each may lose some or all of the intended benefits of the merger.

Risks Related to the Reverse Stock Split

The reverse stock split may not increase Zafgen’s stock price over the long-term.

The principal purpose of the reverse stock split is to increase the per-share market price of Zafgen common stock above the minimum bid price requirement under the NASDAQ rules so that the listing of the combined company and the shares of Zafgen common stock being issued in the merger on NASDAQ will be approved. It cannot be assured, however, that the reverse stock split will accomplish this objective for any meaningful period of time. While it is expected that the reduction in the number of outstanding shares of common stock will proportionally increase the market price of Zafgen common stock, it cannot be assured that the reverse stock split will increase the market price of its common stock by a multiple of the reverse stock split ratio chosen by the Zafgen Board in its sole discretion, or result in any permanent or sustained increase in the market price of Zafgen common stock, which is dependent upon many factors, including Zafgen’s business and financial performance, general market conditions, and prospects for future success. Thus, while the stock price of the combined company might meet the continued listing requirements for NASDAQ initially, it cannot be assured that it will continue to do so.

The reverse stock split may decrease the liquidity of Zafgen common stock.

Although the Zafgen Board believes that the anticipated increase in the market price of Zafgen common stock could encourage interest in its common stock and possibly promote greater liquidity for its stockholders, such liquidity could also be adversely affected by the reduced number of shares outstanding after the reverse stock split. The reduction in the number of outstanding shares may lead to reduced trading and a smaller number of market makers for Zafgen common stock.

The reverse stock split may lead to a decrease in Zafgen’s overall market capitalization.

Should the market price of Zafgen common stock decline after the reverse stock split, the percentage decline may be greater, due to the smaller number of shares outstanding, than it would have been prior to the reverse stock split. A reverse stock split is often viewed negatively by the market and, consequently, can lead to a decrease in Zafgen’s overall market capitalization. If the per share market price does not increase in proportion to the reverse stock split ratio, then the value of the combined company, as measured by its stock capitalization, will be reduced. In some cases, the per-share stock price of companies that have effected reverse stock splits subsequently declined back to pre-reverse split levels, and accordingly, it cannot be assured that the total market value of Zafgen common stock will remain the same after the reverse stock split is effected, or that the reverse stock split will not have an adverse effect on Zafgen’s stock price due to the reduced number of shares outstanding after the reverse stock split.

Risks Related to Zafgen

Zafgen may not be able to comply with all applicable listing requirements or standards of NASDAQ and NASDAQ could delist Zafgen common stock.

Zafgen common stock is currently listed on NASDAQ. In order to maintain that listing, Zafgen must satisfy minimum financial and other continued listing requirements and standards. One such requirement is that Zafgen

 

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maintain a minimum bid price of at least $1.00 per share for Zafgen common stock. For example, in April 2020, Zafgen received a letter from the Listing Qualifications Department of the NASDAQ (referred to as the “NASDAQ Notice”) advising Zafgen that for 30 consecutive trading days preceding the date of the NASDAQ Notice, the bid price of Zafgen common stock had closed below the $1.00 per share minimum required for continued listing on NASDAQ pursuant to Nasdaq Listing Rule 5450(a)(1) (referred to as the “minimum bid price requirement”).

Under Nasdaq Listing Rule 5810(c)(3)(A), if during the 180 calendar day period following the date of the NASDAQ Notice the closing bid price of Zafgen common stock is at or above $1.00 for a minimum of 10 consecutive business days, Zafgen will regain compliance with the minimum bid price requirement and Zafgen common stock will continue to be eligible for listing on NASDAQ, absent noncompliance with any other requirement for continued listing. On April 16, 2020, NASDAQ announced it was providing temporary relief from continued listing bid price requirements through June 30, 2020. Under the relief Zafgen will have additional time to regain compliance with the listing bid price requirements with the compliance period beginning July 1, 2020. As such, the compliance period for Zafgen will expire on December 28, 2020.

If Zafgen does not regain compliance with the minimum bid price requirement within an allotted grace period, then under Nasdaq Listing Rule 5810(c)(3)(A)(i) Zafgen may transfer to The Nasdaq Capital Market, provided that Zafgen meets the applicable market value of the publicly held shares requirement for continued listing as well as all other standards for initial listing of Zafgen common stock on The Nasdaq Capital Market and Zafgen notifies NASDAQ of Zafgen’s intention to cure the deficiency during a second grace period. Following a transfer to The Nasdaq Capital Market, Zafgen may be afforded an additional 180-days to regain compliance with the minimum bid price requirement. If Zafgen does not regain compliance with the minimum bid price requirement within the allotted grace period, shares of Zafgen common stock would be subject to delisting. In the event that Zafgen common stock is not eligible for continued listing on NASDAQ or another national securities exchange, trading of Zafgen common stock could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, Zafgen common stock, and there would likely also be a reduction in Zafgen coverage by security analysts and the news media, which could cause the price of Zafgen common stock to decline further. Also, it may be difficult for Zafgen to raise additional capital if Zafgen is not listed on a major exchange.

In September 2019, Zafgen received a similar notice from NASDAQ that Zafgen was not in compliance with the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on NASDAQ. Prior to the expiration of the then compliance period, Zafgen came into compliance with the minimum bid price requirements and was notified by NASDAQ of such compliance and the matter was closed.

For additional risks related to the business of Zafgen, please refer to the section entitled “Item 1A. Risk Factors” set forth in Zafgen’s Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on March 5, 2020, as updated by the subsequent quarterly reports on Form 10-Q.

Risks Related to Chondrial

Risks Related to Chondrial’s Financial Position and Need for Capital

Chondrial has incurred significant losses since its inception and anticipates that it will incur continued losses for the foreseeable future.

Since Chondrial’s inception in November 2016, it has devoted substantially all of its resources to the development of CTI-1601. Chondrial has incurred significant losses in each year of operation since its inception. For the year ended December 31, 2019, Chondrial had net losses of $23.1 million and as of December 31, 2019, had an accumulated deficit of $23.1 million and Chondrial expects to continue to incur significant expenses and net operating losses for the foreseeable future. The Chondrial financial statements for the years ended December 31, 2019 and December 31, 2018 include disclosures regarding management’s assessment of Chondrial’s ability

 

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to continue as a going concern and a report from Chondrial’s independent registered public accounting firm that includes an explanatory paragraph regarding going concern, as there is substantial doubt about Chondrial’s ability to continue as a going concern due to its current liquidity position and recurring losses from operations since inception and negative cash flows from operating activities.

Chondrial has devoted substantially all of its financial resources and efforts to research and development, including nonclinical studies and Chondrial’s clinical development program as well as the development of manufacturing processes. Chondrial expects to incur significant losses for the foreseeable future to further develop and commercialize its lead drug candidate.

Chondrial expects that its expenses will increase substantially if and as it:

 

   

continues clinical development efforts for CTI-1601;

 

   

seeks regulatory and marketing approvals for Chondrial’s product candidates that successfully complete clinical trials, if any;

 

   

establishes sales, marketing, distribution and other commercial infrastructure to commercialize various products for which Chondrial may obtain marketing approval, if any;

 

   

contracts for the manufacture of larger quantities of product candidates for clinical development and potentially commercialization;

 

   

maintains, expands and protects Chondrial’s intellectual property portfolio; and

 

   

hires and retains additional personnel, such as clinical, quality control, regulatory, finance, and compliance personnel.

Net losses and negative cash flows have had, and will continue to have, an adverse effect on Chondrial’s stockholder’s (deficit) equity and working capital.

Chondrial has no commercial revenue and may never become profitable.

To date, Chondrial has not generated any commercial revenue. Chondrial’s ability to generate revenue and become profitable depends upon its ability to obtain regulatory approval for, and successfully commercialize, CTI-1601 or other product candidates that it may develop, in-license or acquire in the future.

This will require success in a range of challenging activities, including completing clinical trials of CTI-1601 or any future product candidates, obtaining marketing approval for CTI-1601 and any future product candidates, manufacturing, marketing and selling those products for which Chondrial, or any future collaborators, may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursement for Chondrial’s products from private insurance or government payors. Even if Chondrial is able to successfully achieve the above, Chondrial does not know what the reimbursement status of CTI-1601 or any other future product candidates will be or when any of these products will generate revenue for Chondrial, if at all. Chondrial has not generated, and does not expect to generate, any product revenue for the foreseeable future, and expects to continue to incur significant operating losses for the foreseeable future due to the cost of research and development, nonclinical studies and clinical trials and the regulatory approval process for CTI-1601 and any future product candidates.

Chondrial’s ability to generate revenue from CTI-1601 or any future product candidates also depends on a number of additional factors, including its ability to:

 

   

successfully complete development activities, including the remaining nonclinical studies and planned clinical trials for its product candidates;

 

   

complete and submit New Drug Applications (referred to as “NDAs”) and Biologics License Applications (referred to as “BLAs”) to the FDA, and Marketing Authorisation Applications (referred to as “MAAs”) to the European Medicines Agency (referred to as the “EMA”), and obtain regulatory approval for indications for which there is a commercial market;

 

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complete and submit applications to, and obtain regulatory approval from, other foreign regulatory authorities;

 

   

manufacture any approved products in commercial quantities and on commercially reasonable terms;

 

   

develop a commercial organization, or find suitable partners, to market, sell and distribute approved products in the markets in which Chondrial has retained commercialization rights;

 

   

achieve acceptance among patients, clinicians and advocacy groups for any products Chondrial develops;

 

   

obtain coverage and adequate reimbursement from third parties, including government payors; and

 

   

set a commercially viable price for any products for which Chondrial may receive approval.

Because of the uncertainties and risks associated with these activities, Chondrial is unable to accurately predict the timing and amount of increased expenses, and if or when it might achieve or maintain profitability. Chondrial and any future collaborators may never succeed in these activities and, even if it does, or any future collaborators do, Chondrial may never generate revenues that are large enough for it to achieve profitability. Even if Chondrial is able to complete the processes described above, it anticipates incurring significant costs associated with commercializing CTI-1601 or any of its future product candidates. Even if Chondrial achieves profitability in the future, it may not be able to sustain profitability in subsequent periods.

Chondrial will need to raise additional funding, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force Chondrial to delay, limit or terminate its product development efforts or other operations.

Chondrial expects to continue to spend substantial and increasing amounts to conduct clinical trials of CTI-1601 and further research and development activities for CTI-1601, and for any additional product candidates that it may develop, in-license or acquire in the future. In addition, Chondrial’s expenses will increase as it expands, through development, in-license or acquisition, its pipeline of product candidates. If Chondrial obtains marketing approval for any of its product candidates, Chondrial will likely incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing, manufacturing and distribution are not the responsibility of a future collaborator. Accordingly, Chondrial will need to obtain additional funding in connection with its continuing operations.

As of December 31, 2019, Chondrial’s existing cash and cash equivalents were $1.0 million. This amount, combined with the cash and cash equivalents of Zafgen that will be acquired in the merger and the additional $15.0 million of funding to be received through the Series B bridge convertible preferred units offering, will not be sufficient to fund all of the efforts that it plans to undertake or to fund the completion of development of CTI-1601. Accordingly, Chondrial will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources. The incurrence of indebtedness would result in increased fixed payment obligations and Chondrial may be required to agree to certain restrictive covenants, such as limitations on its ability to incur additional debt, limitations on its ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact its ability to conduct its business.

Any additional fundraising efforts may divert Chondrial’s management from their day-to-day activities, which may adversely affect its ability to develop and commercialize its product candidates. In addition, Chondrial cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to it, if at all. Chondrial could also be required to seek funds through arrangements with collaborative partners or otherwise at an earlier stage than otherwise would be desirable and it may be required to relinquish rights to some of its technologies or product candidates or otherwise agree to terms unfavorable to Chondrial, any of which may have a material adverse effect on its business, operating results and prospects.

If Chondrial is unable to obtain funding on a timely basis, or on acceptable terms, it may be required to significantly curtail, delay or discontinue one or more of its research or development programs or the

 

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commercialization of any product candidate. Chondrial’s failure to raise capital as and when needed would have a negative impact on its business, financial condition and results of operations and its ability to pursue the development of CTI-1601 or future product candidates.

Raising additional capital may cause dilution to Chondrial’s existing stockholders, restrict its operations or require it to relinquish rights to its technologies, CTI-1601 or other product candidates that it may develop, in-license or acquire in the future.

Chondrial may seek additional capital through a combination of private and public equity offerings, debt financings, strategic partnerships and alliances and licensing arrangements. To the extent Chondrial raises additional capital through the sale of equity or convertible debt securities, existing ownership interests will be diluted and the terms of such financings may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financings may be coupled with an equity component, such as warrants to purchase shares, which could also result in dilution of Chondrial’s existing stockholder’s ownership.

If Chondrial raises additional funds through strategic partnerships and alliances and licensing arrangements with third parties, it may have to relinquish valuable rights to CTI-1601 or other product candidates that it may develop, in-license or acquire in the future, or grant licenses on terms that are not favorable to it.

Chondrial’s ability to use its NOLs and certain other tax attributes may be limited.

Under Section 382 of the Code, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. Chondrial has completed several financings since its inception, which it believes have resulted in a change in control as defined by Section 382 of the Code. Chondrial may also experience ownership changes in the future as a result of subsequent shifts in its stock ownership. As a result, if Chondrial earns net taxable income, its ability to use its pre-change NOLs to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to Chondrial. The Tax Cuts and Jobs Act of 2017 (referred to as the “Tax Act”), which significant reformed the Code, also reduced the corporate income tax rate to 21%, from a prior rate of 35%. This may cause a reduction in the economic benefit of Chondrial’s NOLs and other deferred tax assets available to Chondrial. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed and would adversely affect Chondrial’s business, financial condition and results of operations.

Risks Related to Chondrial’s Product Development and Regulatory Approvals

The success of Chondrial is currently dependent upon the success of its sole product candidate, CTI-1601, which is currently in Phase 1 clinical trials. Chondrial cannot be certain that it will be successful with its clinical development or that Chondrial will be able to obtain regulatory approval for CTI-1601.

Chondrial currently has no drug products for sale and its business is currently dependent on its successful clinical development, regulatory approval and commercialization of CTI-1601, which is in Phase 1 clinical trials.

If Chondrial’s efforts to develop and commercialize CTI-1601 for the treatment of Friedreich’s Ataxia are unsuccessful, or Chondrial experiences significant delays in doing so, its business could also be substantially harmed. The success of CTI-1601 will depend on several factors, including the following:

 

   

maintaining its IND application with the FDA in order to continue to conduct clinical trials in the United States;

 

   

successfully recruiting, enrolling and retaining patients in and completing Chondrial’s Phase 1 clinical trials and any clinical trials it may conduct in the future;

 

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demonstrating safety, tolerability and efficacy profiles that are satisfactory to the FDA, EMA and other comparable regulatory authorities for marketing approval;

 

   

successfully completing all necessary toxicology studies to support clinical development and regulatory approval for CTI-1601;

 

   

receiving timely marketing approvals from applicable regulatory authorities;

 

   

managing the extent and cost of any required post-marketing approval commitments to applicable regulatory authorities;

 

   

establishing and maintaining arrangements with third-party manufacturers for CTI-1601, including developing, validating and maintaining a commercially viable manufacturing process that is compliant with current good manufacturing practices (referred to as “cGMPs”);

 

   

obtaining, maintaining and protecting Chondrial’s patents, trade secrets and regulatory exclusivity in the United States and other countries;

 

   

successfully launching commercial sales following any marketing approval, including establishing a specialty sales organization, if applicable;

 

   

obtaining commercial acceptance of Chondrial’s products, if approved, by patients, the medical community and third-party payors and obtaining and maintaining healthcare coverage and adequate reimbursement;

 

   

maintaining an acceptable safety profile following any marketing approval; and

 

   

competing with other therapies.

Many of these factors are outside of Chondrial’s control, including the clinical development and regulatory approval processes, results of nonclinical and toxicology studies and clinical trials, potential threats to Chondrial’s intellectual property rights and the manufacturing, marketing and sales efforts, respectively, of any current or future third-party contractors. The process of obtaining regulatory approval is expensive and time consuming. The FDA and foreign regulatory authorities may never approve CTI-1601 for sale and marketing, and even if CTI-1601 is ultimately approved, regulatory approval may be delayed or limited in the United States or in other jurisdictions. Even if Chondrial is authorized to sell and market CTI-1601 in one or more markets, there is no assurance that Chondrial will be able to successfully market CTI-1601 or that CTI-1601 will achieve market acceptance sufficient to generate profits. If Chondrial is unable to successfully develop and commercialize CTI-1601 due to failure to obtain regulatory approval for CTI-1601, to successfully market CTI-1601, to generate profits from the sale of CTI-1601, or due to other risk factors outlined in this report, it would have material adverse effects on Chondrial’s business, financial condition, and results of operations as CTI-1601 is currently Chondrial’s sole product candidate.

Clinical development is a lengthy and expensive process with an uncertain outcome, and the results of nonclinical studies, toxicology studies or clinical trials may not be predictive of future nonclinical studies, toxicology studies or clinical trial results.

Clinical development is expensive and can take many years to complete, and its outcome is inherently uncertain. Chondrial cannot guarantee that any nonclinical studies, toxicology studies or clinical trials will be conducted as planned or completed on schedule, if at all, and failure can occur at any time during the nonclinical study, toxicology study or clinical trial process. Despite promising nonclinical, toxicology or clinical results, any product candidate can unexpectedly fail at any stage of nonclinical, toxicology or clinical development. The historical failure rate for product candidates in Chondrial’s industry is high, especially for products in early stages of development.

The results from nonclinical studies, toxicology studies or clinical trials of a product candidate may not predict the results of later nonclinical or clinical trials of the product candidate, and interim results of a clinical

 

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trial are not necessarily indicative of final results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy characteristics despite having progressed through nonclinical studies and initial clinical trials. It is not uncommon to observe results in clinical trials that are unexpected based on nonclinical studies and early clinical trials, and many product candidates fail in clinical trials despite very promising early results.

Moreover, this and any future nonclinical and clinical data may be susceptible to varying interpretations and analyses. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in clinical development even after achieving promising results in earlier studies. Furthermore, Chondrial cannot assure you that it will be able to successfully progress any future nonclinical programs from candidate identification to Phase 1 clinical development. As is typical in candidate development, Chondrial has a program of ongoing toxicology studies in animals for CTI-1601 and cannot provide assurance that the findings from such studies or any ongoing or future clinical trials will not adversely affect the clinical development of CTI-1601. For the foregoing reasons, Chondrial cannot be certain that its ongoing and planned nonclinical studies and clinical trials will be successful. If nonclinical or clinical trials for CT1-1601 or any future product candidates or indications fail to demonstrate safety or efficacy to the satisfaction of the FDA or the equivalent regulatory authorities in other countries, the FDA or equivalent regulatory authority will not approve Chondrial’s product candidates in those and other indications, which could have a material adverse effect on Chondrial’s business, financial condition and results of operations.

Chondrial does not know whether any clinical trials for CTI-1601 will be completed on schedule, if at all, as the commencement and completion of clinical trials can be delayed, prevented or terminated for a number of reasons, including as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by Chondrial, the FDA, other regulatory authorities, the institutional review boards (referred to as “IRBs”) or ethics committees, a data monitoring committee, or safety review committee, overseeing the clinical trial at issue or other regulatory authorities due to a number of factors, including, among others:

 

   

failure to conduct the clinical trial in accordance with regulatory requirements or Chondrial’s clinical protocols;

 

   

inspection of the clinical trial operations or trial sites by the FDA, the EMA, or other applicable regulatory authorities that reveals deficiencies or violations that require Chondrial to undertake corrective action, including the imposition of a partial clinical hold or a full clinical hold;

 

   

unforeseen safety issues, including any that could be identified in Chondrial’s prior or ongoing toxicology studies, adverse events or lack of effectiveness;

 

   

changes in government regulations or administrative actions;

 

   

problems with clinical supply materials;

 

   

lack of adequate funding to continue the clinical trial;

 

   

challenges in recruiting and enrolling patients to participate in clinical trials, including the size and nature of the patient population, the proximity of patients to clinical trial sites, eligibility criteria for the clinical trial, the nature of the clinical trial protocol, the availability of approved effective treatments for the relevant disease and competition from other clinical trial programs for similar indications;

 

   

difficulties in retaining or recruiting clinical investigators in Chondrial’s ongoing or future clinical trials;

 

   

difficulties retaining patients who have enrolled in a clinical trial but may be prone to withdraw due to rigors of the clinical trial, perceived lack of efficacy, side effects, screening and monitoring measures, personal issues or loss of interest;

 

   

severe or unexpected drug-related adverse events experienced by patients in a clinical trial;

 

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the FDA, the EMA, or other applicable regulatory authorities may disagree with Chondrial’s clinical trial designs, Chondrial’s interpretation of data from clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for Chondrial’s clinical trials; and

 

   

reports from nonclinical studies or clinical testing of other therapies that raise safety or efficacy concerns.

Failures or delays in the completion of Chondrial’s clinical trials could result in increased costs and could delay, prevent or limit its ability to generate revenue and continue Chondrial’s business.

Chondrial’s lead product candidate CTI-1601 is currently in Phase 1 clinical trials, and there are a number of FDA regulatory requirements that Chondrial must satisfy before it can commence late-stage clinical trials of CTI-1601. To receive approval of CTI-1601 in other countries Chondrial will also have to satisfy their regulatory requirements. Satisfaction of these requirements will entail substantial time, effort and financial resources. Chondrial may never satisfy these requirements. Clinical trials may also be delayed or terminated as result of ambiguous or negative interim results or events outside of Chondrial’s control. Chondrial is currently evaluating CTI-1601 in a SAD Phase 1 clinical trial in patients with Friedreich’s Ataxia. The first two cohorts of patients have completed the SAD clinical trial; however, due to the continued impact of COVID-19, Chondrial has delayed initiation of the next cohort in the SAD clinical trial. Chondrial is conducting the clinical trial 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. The travel advisories and risk of infection related to COVID-19 have presented increased risks to patients traveling to Chondrial’s clinical trial site for dosing. Due to the uncertainty surrounding COVID-19, Chondrial cannot estimate when the next cohort of patients will begin the clinical trial. While top line results from the SAD and MAD 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 may result in top line results being delayed until the first half of 2021. If Phase 1 clinical trials of CTI-1601 fail or further delays occur, Chondrial may not be able to develop and commercialize CTI-1601 and could fail to realize the potential advantages of doing so, and it could materially adversely affect Chondrial’s business, financial condition and results of operations.

Chondrial may not be successful in its efforts to identify, discover or acquire additional product candidates.

Chondrial only has one product candidate CTI-1601, which is in Phase 1 clinical trials in the United States. Therefore, the success of Chondrial’s business largely depends upon Chondrial’s ability to identify, develop, in-license or acquire and commercialize products targeting rare diseases. Chondrial may focus its efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful. In addition, Chondrial’s research methodology may be unsuccessful in identifying potential product candidates or Chondrial’s potential product candidates may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval.

Research programs to identify new product candidates require substantial technical, financial and human resources. Chondrial may focus Chondrial’s efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful. If any of these events occur, Chondrial may be forced to abandon Chondrial’s development efforts for a program or programs, which would have a material adverse effect on Chondrial’s business, financial condition and results of operations.

Chondrial has no marketed proprietary products and has not yet advanced a product candidate beyond Phase 1 clinical trials, which makes it difficult to assess Chondrial’s ability to develop CTI-1601 or any future product candidates and commercialize any resulting products independently.

As a company, Chondrial has no experience in Phase 2 and later stage clinical development, and related regulatory requirements or the commercialization of products. Chondrial has not yet demonstrated its ability to

 

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independently and repeatedly conduct clinical development after Phase 1, which has not yet been successfully completed, successfully conduct an international multi-center clinical trial, complete a clinical trial, conduct a pivotal clinical trial, obtain regulatory approval, manufacture drug product on a commercial scale or arrange for a third party to do so on Chondrial’s behalf, and commercialize therapeutic products. Chondrial will need to develop such abilities if it is to execute on its business strategy to develop and independently commercialize product candidates for orphan and niche indications. To execute on Chondrial’s business plan for the development of independent programs, it will need to successfully:

 

   

execute its clinical development plans for later-stage product candidates;

 

   

obtain required regulatory approvals in each jurisdiction in which it will seek to commercialize products;

 

   

build and maintain appropriate sales, distribution and marketing capabilities;

 

   

gain market acceptance for its future products, if any; and

 

   

manage its spending as costs and expenses increase due to clinical trials, regulatory approvals and commercialization activities.

If Chondrial is unsuccessful in accomplishing these objectives, it will not be able to develop and commercialize any product candidates independently and could fail to realize the potential advantages of doing so, and it would materially adversely affect Chondrial’s business, financial condition and results of operations.

Chondrial cannot be certain that it will be able to successfully complete clinical trials for CTI-1601 or any other product candidates.

Chondrial currently has only one product candidate in clinical development, CTI-1601, which is in Phase 1 clinical trials in the United States. Chondrial’s business currently depends primarily on CTI-1601’s successful clinical development, regulatory approval and commercialization. Chondrial submitted its IND and its application has gone into effect, permitting the conduct of clinical trials. However, the outcome of toxicology studies and early clinical trials may not be positive and may not be predictive of the success of later nonclinical studies or clinical trials, and interim results of clinical trials do not necessarily predict success in those or future clinical trials.

Published clinical data or case reports from third parties or early clinical trial data of CTI-1601 or any future product candidates may not be predictive of the results of later-stage clinical trials. Interpretation of results from early, usually smaller, studies that suggest a clinically meaningful response in some patients, requires caution. Results from later stages of clinical trials enrolling more patients may fail to show the desired safety or efficacy results or otherwise fail to be consistent with the results of earlier trials of the same product candidate. Later clinical trial results may not replicate earlier clinical trials for a variety of reasons, including differences in trial design, different trial endpoints (or lack of trial endpoints in exploratory studies), patient population, number of patients, patient selection criteria, trial duration, drug dosage and formulation and lack of statistical power in the earlier trials. These uncertainties are enhanced where the diseases under study lack established clinical endpoints, validated measures of efficacy, as is often the case with orphan diseases for which no drugs have been developed previously and where the product candidates target novel mechanisms. For example, to Chondrial’s knowledge, CTI-1601 is the only protein replacement therapy being developed for the treatment of Friedreich’s Ataxia and therefore nonclinical studies may not be adequate to predict efficacy in a clinical trial due to its novel protein replacement therapy platform.

In some instances, there can be significant variability in safety or efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, variability of the disease being studied, changes in and adherence to the dosing regimen and other clinical trial protocols and the rate of dropout among

 

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clinical trial participants. If Chondrial fails to receive positive results in clinical trials of CTI-1601, the development timeline and regulatory approval and commercialization prospects for CTI-1601, and, correspondingly, Chondrial’s business, financial prospects and results of operation would be negatively impacted.

Further, CTI-1601 or any future product candidates may not be approved even if they achieve their primary endpoint in clinical trials. The FDA, EMA or foreign regulatory authorities may disagree with Chondrial’s trial design and its interpretation of data from nonclinical studies and clinical trials. In addition, any of these regulatory authorities may change its requirements for the approval of a product candidate even after reviewing and providing comments or advice on a protocol for a pivotal clinical trial that, if successful, would potentially form the basis for an application for approval by the FDA, EMA or another regulatory authority. Furthermore, any of these regulatory authorities may also approve CTI-1601 or any future product candidates for a narrower indication than Chondrial may request or may grant approval contingent on the performance of costly post-marketing clinical trials. Any of the above could materially adversely affect Chondrial’s business, financial condition and results of operations.

Unforeseen safety issues or adverse events, including any that may be identified in Chondrial’s ongoing toxicology studies or clinical trials, may delay or prevent the development and regulatory approval of CTI-1601, damage public perception of the safety of CTI-1601 or increase government regulation of CTI-1601.

Chondrial is collecting data about CTI-1601 from ongoing Phase 1 clinical trials and toxicology studies and unforeseen safety issues or adverse events caused by, or other unexpected properties of, CTI-1601 could be identified. Such safety issues or adverse events could cause Chondrial or regulatory authorities to interrupt, delay or halt clinical trials of CTI-1601 or could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities for CTI-1601, which would materially adversely affect Chondrial’s business, financial condition and results of operations.

Even if Chondrial was to receive regulatory approval for CTI-1601 following such events, these events could damage public perception of the safety of CTI-1601 and prevent Chondrial from achieving or maintaining market acceptance of CTI-1601 and significantly impact Chondrial’s ability to successfully commercialize CTI-1601 and generate revenues, all of which would materially adversely affect Chondrial’s business, financial condition and results of operations.

Chondrial may experience difficulties identifying and enrolling patients in its clinical trials given the limited number of patients who have the diseases for which CTI-1601 is being studied or for any other product candidate it may study in the future. Difficulty in enrolling patients could delay or prevent clinical trials of CTI-1601 or any future product candidate.

Identifying and qualifying patients to participate in clinical trials of CTI-1601 is critical to Chondrial’s success. The timing of Chondrial’s clinical trials depends in part on the speed at which it can recruit patients to participate in testing CTI-1601, and Chondrial may experience delays in its clinical trials if it encounters difficulties in enrollment.

The conditions for which Chondrial is planning to evaluate CTI-1601, and any product candidates it may evaluate in the future, are rare genetic diseases. Accordingly, there are limited patient pools from which to draw for clinical trials. Chondrial is investigating its product candidate in Friedreich’s Ataxia, a rare disease. Arranging for investigative sites and recruiting patients for clinical trials in this disease may be very difficult. In addition, if other companies are investigating their investigational products in Friedreich’s Ataxia, it may be more difficult to enroll eligible patients into Chondrial’s clinical trials. If the actual number of patients with Friedreich’s Ataxia is lower than Chondrial believes or if any approval that Chondrial obtains is based on a narrower definition of these patient populations, then the potential market for CTI-1601 will be smaller than Chondrial anticipates.

 

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In addition to the rarity of Friedreich’s Ataxia and other diseases that Chondrial is studying, the eligibility criteria of Chondrial’s clinical trials will further limit the pool of available study participants as it will require patients to have specific characteristics that it can measure to assure their disease is either severe enough or not too advanced to include them in a clinical trial. The process of finding and diagnosing patients may prove costly, especially since the diseases Chondrial is studying are rare. Chondrial also may not be able to identify, recruit, and enroll a sufficient number of appropriate patients to complete its clinical trials because of demographic criteria for prospective patients, the perceived risks and benefits of the product candidate under study, the proximity and availability of clinical trial sites for prospective patients, and the patient referral practices of physicians. The availability and efficacy of competing therapies and clinical trials can also adversely impact enrollment. If patients are unwilling to participate in Chondrial’s trials for any reason, the timeline for recruiting patients, conducting trials, and obtaining regulatory approval of potential products may be delayed, the commercial prospects of Chondrial’s product candidates will be harmed, and its ability to generate product revenue from any of these product candidates could be delayed or prevented. Furthermore, Chondrial’s inability to enroll a sufficient number of patients for Chondrial’s clinical trials could result in significant delays or may require Chondrial to abandon one or more clinical trials altogether. Enrollment delays in Chondrial’s clinical trials may result in increased development costs for CTI-1601 or any future product candidates, and jeopardize Chondrial’s ability to achieve Chondrial’s clinical development timeline and goals, including the dates by which Chondrial will commence, complete and receive results from clinical trials. Enrollment delays in Chondrial’s clinical trials may also jeopardize Chondrial’s ability to commence sales of and generate revenues from CTI-1601, which could cause the value of Chondrial’s company to decline and limit Chondrial’s ability to obtain additional financing, if needed. Any of these occurrences may harm Chondrial’s business, financial condition, and prospects significantly.

Friedreich’s Ataxia has no FDA-approved treatments, and clinical endpoints required to obtain approval are not well defined.

There are currently no therapies approved to treat Friedreich’s Ataxia. Chondrial has concentrated its research and development efforts on developing a novel therapeutic for the treatment of Friedreich’s Ataxia, and its future success depends on the success of this therapeutic approach. The clinical trial requirements of the FDA and other comparable regulatory agencies and the criteria these regulators use to determine the safety and efficacy of any product candidate vary substantially according to the type, complexity, novelty and intended use and market of the potential product. Given the nature of Friedreich’s Ataxia, Chondrial may have to devise novel clinical endpoints to be tested in its clinical trials, which can lead to some subjectivity in interpreting trial results and could result in regulatory agencies not agreeing with the validity of Chondrial’s endpoints, or Chondrial’s interpretation of the clinical data, and therefore denying approval, which would materially adversely affect Chondrial’s business, financial condition and results of operations. As a result, the design and conduct of clinical trials for a therapeutic product candidate such as CTI-1601 that is intended to deliver human FXN through a subcutaneously administered, recombinant fusion protein in Friedreich’s Ataxia patients is subject to unknown risks, and Chondrial may experience setbacks with its ongoing or planned clinical trials of CTI-1601 in Friedreich’s Ataxia because of the limited clinical experience with its mechanism of action in these patients.

In particular, regulatory authorities in the United States and the European Union (also referred to as the “EU”) have not issued definitive guidance as to how to measure and achieve efficacy in treatments for Friedreich’s Ataxia. As a result, the design and conduct of clinical trials of CTI-1601 may take longer, be more costly or be less effective as part of the novelty of development in Friedreich’s Ataxia. Chondrial may use new or novel endpoints or methodologies, and the FDA or other regulatory authorities may not consider the endpoints of its clinical trials to provide clinically meaningful results. Even if applicable regulatory authorities do not object to Chondrial’s proposed endpoints in an earlier stage clinical trial, such regulatory authorities may require evaluation of additional or different clinical endpoints in later-stage clinical trials.

 

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CTI-1601 may cause adverse events or undesirable side effects that could delay or prevent its regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

Chondrial is collecting data about CTI-1601 from ongoing Phase 1 clinical trials and toxicology studies and any adverse events or undesirable side effects caused by, or other unexpected properties of, CTI-1601 could cause Chondrial, any future collaborators, an IRB or ethics committee or regulatory authorities to interrupt, delay or halt clinical trials of Chondrial’s product candidate and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities. It is possible that as Chondrial progresses CTI-1601 through clinical trials and toxicology studies, or as the use of CTI-1601 becomes more widespread if it receives regulatory approval, illnesses, injuries, discomforts and other adverse events that were not observed in earlier trials, as well as conditions that did not occur or went undetected in previous trials, will be reported by patients. If such side effects become known later in development or after approval, such findings may harm Chondrial’s business, financial condition and prospects significantly. Further, if a serious safety issue is identified in connection with the use of CTI-1601 commercially or in third-party clinical trials elsewhere, such issues may adversely affect the development potential of CTI-1601 elsewhere or result in regulatory authorities restricting Chondrial’s ability to develop or commercialize CTI-1601.

Further, if CTI-1601, were to receive marketing approval and Chondrial or others identify undesirable side effects caused by the product (or any other product) after the approval, a number of potentially significant negative consequences could result, including:

 

   

regulatory authorities may request that Chondrial recall or withdraw the product from the market or may limit the approval of the product through labeling or other means;

 

   

regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication or a precaution;

 

   

Chondrial may be required to change the way the product is distributed or administered, conduct additional clinical trials or change the labeling of the product;

 

   

Chondrial may decide to recall or remove the product from the marketplace;

 

   

Chondrial could be sued and/or held liable for injury caused to individuals exposed to or taking Chondrial’s product candidates; and

 

   

Chondrial’s reputation may suffer.

Any of these events could prevent Chondrial from achieving or maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercializing Chondrial’s product candidates and significantly impact Chondrial’s ability to successfully commercialize Chondrial’s product candidates and generate revenues, all of which would materially adversely affect Chondrial’s business, financial condition and results of operations.

Chondrial’s approach to discover and develop fusion proteins for delivering proteins is novel and may never lead to marketable products.

Chondrial has concentrated its efforts and research and development activities on delivering proteins (FXN or other) to intracellular targets. Chondrial’s future success depends on the successful development and manufacturing of such therapeutics and the effectiveness of Chondrial’s platform. The scientific discoveries that form the basis for Chondrial’s research are relatively new.

CTI-1601 uses a novel and unproven approach and mechanism to treat Friedreich’s Ataxia and therefore its efficacy and safety are difficult to predict, and there is no guarantee that CTI-1601 will be approved by the FDA.

If Chondrial’s lead product candidate proves to be ineffective, unsafe or commercially unviable, it is possible that Chondrial’s platform and pipeline would have little, if any, value, which would substantially harm

 

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Chondrial’s business, financial condition, results of operations and prospects. In addition, Chondrial’s approach may expose Chondrial to additional financial risks and make it more difficult to raise additional capital than other, more advanced proven technologies, which would materially adversely affect Chondrial’s business, financial condition and results of operations.

Protein replacement therapies are novel, complex and difficult to manufacture. Chondrial could experience manufacturing problems that result in delays in the development or commercialization of Chondrial’s protein replacement therapy platform or product candidates or otherwise harm Chondrial’s business.

The manufacture of fusion proteins, such as CTI-1601 and any fusion protein candidates, is technically complex and necessitates substantial expertise and capital investment. Production difficulties caused by unforeseen events may delay the availability of material for clinical trials and commercial products for CTI-1601 or any fusion protein product that may receive regulatory approval in the future. Additionally, because biologic products are complex, the manufacture of such products and product candidates is more difficult and costly. Chondrial may not be able to have such products reliably manufactured in accordance with the applicable regulatory requirements in sufficient quantities to support its development programs and, if ultimately approved, commercial supply. Chondrial contracts with third parties for the manufacturing of program materials for CTI-1601.

There are a limited number of contract manufacturers who specialize in the manufacture of biologic products and those that do may still be developing appropriate processes, controls and facilities for large-scale production. While Chondrial believes that there will be sufficient sources of supply that can satisfy its clinical and commercial requirements, it cannot be certain that it will be able to identify and establish additional relationships with such sources, if necessary, in a timely manner or at all, and what the terms and costs of such new arrangements would be, or that such suppliers would be able to supply Chondrial’s potential commercial needs. Furthermore, in the event Chondrial’s primary manufacturer cannot meet its needs, any switch to an alternative manufacturer would result in a significant delay, would require FDA approval, and cause material additional costs.

As further described in these risk factors, the manufacturers of biologic products must comply with strictly enforced cGMP requirements, state and federal regulations, as well as foreign requirements when applicable. Any failure by Chondrial or its contract manufacturing organizations to adhere to or document compliance to such regulatory requirements could lead to a delay or interruption in the availability of Chondrial’s program materials for clinical trials or commercial use, among other consequences. If Chondrial or its manufacturers fail to comply with the FDA, EMA, or other regulatory authorities, it could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, clinical holds or termination of clinical trials, warning or untitled letters, regulatory communications warning the public about safety issues with a product, import or export refusals, license revocation, seizures, detentions, or recalls of product candidates or product, operating restrictions, criminal prosecutions or debarment, suits under the civil False Claims Act, corporate integrity agreements, or consent decrees any of which could significantly and adversely affect supplies of Chondrial’s product candidates and its business, financial conditions and results of operations could be materially adversely affected.

Chondrial’s dependence upon others for the manufacture of its product candidates may also adversely affect its business, results of operations, financial condition and results of operations, and its ability to commercialize any product candidates that receive regulatory approval on a timely and competitive basis.

Fast track designation by the FDA or any future designations may not lead to a faster development, regulatory review or approval process and it does not increase the likelihood that any of Chondrial’s product candidates will receive marketing approval.

Chondrial has received fast track therapy designation for CTI-1601 for the treatment of Friedreich’s Ataxia. Chondrial may, in the future, apply for other accelerated programs from the FDA (such as breakthrough therapy

 

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or accelerated approval) for CTI-1601 or future product candidates. Designation for these programs is within the discretion of the FDA. Accordingly, even if Chondrial believes CTI-1601 or a future product candidate meets the criteria for designation, the FDA may disagree. In any event, the receipt of a designation may not result in a faster development process, review or approval compared to products considered for approval under conventional FDA procedures and, in any event, does not assure ultimate approval by the FDA. In addition, even though CTI-1601 has been designated as fast track, the FDA may later decide that it no longer meets the criteria for designation and revoke it. If Chondrial applies for designation to additional accelerated programs from the FDA for CTI-1601 or future product candidates, the FDA might not grant the designation. If Chondrial applies for any similar programs in foreign countries for CTI-1601 or future product candidates, those designations also might not be granted by the regulatory authorities of those countries. Any of the above could adversely affect Chondrial’s business, financial condition and results of operations.

If Chondrial fails to maintain orphan drug designation or other regulatory exclusivity for CTI-1601 or obtain such exclusivity for any of its other product candidates in the future, Chondrial’s competitive position would be harmed

Chondrial received orphan drug designation from the FDA for CTI-1601 in July 2017. In the United States, orphan drug designation entitles a party to financial incentives such as tax advantages and user-fee waivers. In addition, if a product candidate that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications, including an NDA, to market the same drug for the same indication for seven years, except in limited circumstances, including if the FDA concludes that the later drug is clinically superior to the approved drug. A drug is clinically superior if it is safer, more effective, or makes a major contribution to patient care. Orphan drug designation neither shortens the development time or regulatory review time of a drug nor gives the drug any advantage in the regulatory review or approval process.

Chondrial may lose orphan drug exclusivity if Chondrial is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition. Moreover, orphan drug exclusivity may not effectively protect Chondrial’s product candidates from competition because different drugs can be approved for the same condition. Even after an orphan drug is approved, the FDA or comparable foreign regulatory authority can subsequently approve the same drug for the same condition if such regulatory authority concludes that the later drug is clinically superior if it is shown to be safer, more effective or makes a major contribution to patient care. Loss of orphan drug designation for CTI-1601 or the failure to obtain such designation in other countries or for any future product candidates could adversely affect Chondrial’s business, financial condition and results of operation.

Although Chondrial has obtained rare pediatric disease designation for CTI-1601, it may not be eligible to receive a priority review voucher in the event the FDA determines it no longer meets the criteria for designation, revokes the designation or that FDA approval does not occur prior to October 1, 2022.

Chondrial received rare pediatric disease designation from the FDA for CTI-1601 in 2019. Chondrial may, in the future, apply for rare pediatric disease designation from the FDA for future product candidates that may qualify for designation. Vouchers for rare pediatric disease drugs are awarded when the designated drug receives approval. CTI-1601 may not receive approval and therefore, Chondrial may not receive a voucher. In addition, even though CTI-1601 has been designated as a drug for a rare pediatric disease, the FDA may later decide that it no longer meets the criteria for designation, revoke the designation or not award the voucher. If Chondrial applies for designation for future product candidates as drugs for rare pediatric diseases, the FDA may not grant the designation. In addition, the current law authorizing the rare pediatric disease program contains sunset provisions such that the FDA cannot award a voucher after September 30, 2020 unless the designation is granted by September 30, 2020 and the application is approved by September 30, 2022. Therefore, if Chondrial does not receive approval for CTI-1601 by September 30, 2022, or the legislation is not extended, it would not be able to receive a voucher. Furthermore, if the legislation is not extended, Chondrial would not be able to request

 

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designation for future product candidates or be eligible to receive vouchers for future product candidates. The failure to maintain rare pediatric disease designation for CTI-1601 or if FDA approval does not occur prior to October 1, 2022 could result in the inability to receive a priority review voucher which could adversely affect Chondrial’s business, financial condition and results of operations.

Changes in regulatory requirements, FDA guidance, guidance from other regulatory authorities or unanticipated events during Chondrial’s clinical trials of CTI-1601 may result in changes to clinical trial protocols or additional clinical trial requirements, which could result in increased costs to Chondrial and could delay Chondrial’s development timeline.

Changes in regulatory requirements, FDA guidance or guidance from EMA or unanticipated events during Chondrial’s clinical trials may force Chondrial to terminate or adjust its clinical program. The FDA, or the applicable regulatory authorities may impose additional clinical trial and/or nonclinical study requirements. Amendments to Chondrial’s clinical trial protocols would require resubmission to the FDA, or the applicable regulatory authorities as well as IRBs and ethics committees for review and approval, which may adversely impact the cost, timing or successful completion of a clinical trial. If Chondrial experiences delays completing, or if Chondrial terminates, any of its clinical trials, or if Chondrial is required to conduct additional clinical trials and/or nonclinical studies, the commercial prospects for CTI-1601 or any other potential product candidates may be harmed and Chondrial’s ability to generate product revenue will be delayed, and it would materially adversely affect Chondrial’s business, financial condition and results of operations.

Regulatory requirements governing biologic products have changed frequently and may continue to change in the future. Such requirements may lengthen the regulatory review process, require Chondrial to perform additional nonclinical studies or clinical trials, and increase Chondrial’s costs, or may force Chondrial to delay, limit or terminate certain of Chondrial’s programs.

Regulatory requirements governing biologic drug products are still evolving and may continue to change in the future. As a result, it is difficult to determine how long it will take or how much it will cost to obtain regulatory approvals for CTI-1601 for the treatment of Friedreich’s Ataxia or any other future protein replacement therapy product candidates in any indication, if at all. Regulatory review agencies and the new requirements and guidelines they promulgate may lengthen the regulatory review process, require Chondrial to perform additional or larger studies, increase Chondrial’s development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of Chondrial’s product candidates or lead to significant post-approval studies, limitations or restrictions. Delays, failure or unexpected costs in obtaining, the regulatory approval necessary to bring Chondrial’s product candidates to market could have a material adverse effect on Chondrial’s business, results of operations, financial condition and prospects.

In addition, the clinical trial requirements of the FDA, the EMA and other regulatory authorities and the criteria these regulators use to determine the safety and efficacy of a product candidate vary substantially according to the type, complexity, novelty and intended use and market of such product candidates. The regulatory approval process for novel product candidates such as Chondrial’s can be more expensive and take longer than for other, better known or more extensively studied product candidates.

The clinical trials of CTI-1601 and any future product candidates are, and the manufacturing and marketing of CTI-1601 and any future product candidates will be subject to extensive and rigorous review and regulation by numerous government authorities in the United States and in other countries, such as within the EU, where Chondrial intends to seek regulatory approval of, and market, any product candidate.

Before obtaining regulatory approvals for the commercial sale of any product candidate, Chondrial must demonstrate through nonclinical testing and clinical trials that the product candidate is safe and effective for use in each target indication. This process can take many years. If marketing approval is obtained, it will likely include post-marketing studies, and other post-marketing requirements, and surveillance such as Risk Evaluation

 

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and Mitigation Strategies (referred to as “REMS”), which will require the expenditure of substantial resources beyond the proceeds Chondrial currently has on hand.

Furthermore, Chondrial is not permitted to market CTI-1601 in the United States or the EU until Chondrial receives approval of a BLA from the FDA or a MAA from the EMA, or in any other foreign countries until Chondrial receives the requisite marketing approval from such countries. The development of drugs for Friedreich’s Ataxia or other rare diseases may require initial nonclinical studies, early and usually smaller, clinical trials and randomized, double-blind placebo controlled long-term safety and efficacy trials in order to test the safety and efficacy of the drug.

CTI-1601 is currently in Phase 1 clinical trials in the United States and will require substantial further clinical development before Chondrial can submit a BLA to the FDA. Development and/or regulatory programs for CTI-1601 in any countries other than the United States (such as a MAA to the EMA) is only in very preliminary stages and may require substantial further development in those countries prior to regulatory submissions seeking regulatory approval for marketing.

Even after successful completion of clinical trials, there is a risk that the FDA or other regulatory agencies may request further information from Chondrial, disagree with Chondrial’s findings or otherwise undertake a lengthy review of its submission.

The FDA and certain European regulatory authorities may delay, limit or deny testing or approval of CTI-1601 for many reasons, including, among others:

 

   

Chondrial may not be able to demonstrate that CTI-1601 is safe and effective to the satisfaction of the FDA or the EMA;

 

   

the results of Chondrial’s clinical trials may not meet the level of statistical or clinical significance required by the FDA or the EMA for marketing approval;

 

   

the FDA or the EMA may disagree with the number, design, size, duration, conduct or implementation of Chondrial’s clinical trials;

 

   

the FDA or the EMA may require that Chondrial conducts additional nonclinical studies or clinical trials;

 

   

the FDA or the EMA may not approve the formulation, manufacturing, labeling or specifications of CTI-1601;

 

   

the contract research organizations (referred to as “CROs”), that Chondrial retains to conduct its clinical trials may take actions outside of Chondrial’s control that materially adversely impact its clinical trials;

 

   

the FDA or the EMA may find the data from nonclinical studies and clinical trials insufficient to demonstrate that CTI-1601’s clinical and other benefits outweigh its safety risks;

 

   

the FDA or the EMA may disagree with Chondrial’s interpretation of data from its nonclinical studies or clinical trials;

 

   

the FDA or the EMA may not accept data generated at Chondrial’s clinical trial sites;

 

   

if and when Chondrial’s BLA is submitted, the FDA could require an FDA advisory committee assessment, or the advisory committee may recommend against approval of Chondrial’s application or may recommend that the FDA require, as a condition of approval, additional nonclinical studies or clinical trials, limitations on approved labeling or distribution and use restrictions;

 

   

the FDA could require development of a REMS as a condition of approval or post-approval, or may not agree with Chondrial’s proposed REMS, or may impose additional requirements that limit the promotion, advertising, distribution, or sales of CTI-1601;

 

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the FDA or the EMA may find deficiencies with or not approve the manufacturing processes or facilities of third-party manufacturers with which Chondrial contracts; or

 

   

the FDA or the EMA may change their approval policies or adopt new regulations.

Any of these factors, many of which are beyond Chondrial’s control, could jeopardize Chondrial’s ability to obtain and/or maintain regulatory approval for and successfully market CTI-1601. Any delay or failure in obtaining required approvals could have a material adverse effect on Chondrial’s business, financial condition and results of operations. This process can take many years and will likely require the expenditure of substantial resources. Of the large number of drugs in development in the United States, only a small percentage will successfully complete the FDA regulatory approval process and be commercialized. It is possible that the FDA or other regulatory agencies will not approve any application that Chondrial submits. It is possible that Chondrial’s product candidates may not obtain appropriate regulatory approvals necessary for Chondrial to commence clinical trials for Chondrial’s product candidates. Accordingly, even if Chondrial is able to obtain the requisite financing to continue to fund Chondrial’s development and clinical trials, Chondrial cannot assure that CTI-1601, or any other of Chondrial’s potential product candidates will be successfully developed or commercialized.

Chondrial is subject to healthcare laws and regulations, and health information privacy and security laws, which could expose it to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers, physicians and others will play a primary role in the recommendation and prescription of CTI-1601 or any potential product candidates, if approved. Chondrial’s future arrangements with third-party payors will expose it broadly to applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which Chondrial markets, sells and distributes CTI-1601 or potential product candidates, if Chondrial obtains marketing approval. In addition, Chondrial may be subject to patient privacy regulation by both the federal government and the states or other countries in which Chondrial conducts its business. Restrictions under applicable federal and state healthcare laws and regulations include the following:

 

   

the federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or paying remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid;

 

   

the federal false claims laws impose criminal and civil penalties, including those from civil whistleblower or qui tam actions pursuant to the federal False Claims Act, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government;

 

   

the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act (referred to as “HIPAA”), imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

   

the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;

 

   

the federal transparency requirements, sometimes referred to as the “Sunshine Act,” under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (referred to as the “ACA”), require manufacturers of drugs, devices, biologics, and

 

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medical supplies to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests;

 

   

HIPAA and its implementing regulations, which impose requirements on certain covered healthcare providers, health plans, and healthcare clearinghouses as well as their respective business associates that perform services for them that involve the use, or disclosure of, individually identifiable health information, relating to the privacy, security and transmission of individually identifiable health information;

 

   

federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers; and

 

   

analogous state laws and regulations, such as state anti-kickback and false claims laws and transparency laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures and drug pricing.

Ensuring that Chondrial’s future business arrangements with third parties comply with applicable healthcare laws and regulations could be costly. It is possible that governmental authorities will conclude that Chondrial’s business practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If Chondrial’s operations, including anticipated activities to be conducted by Chondrial’s sales team, were found to be in violation of any of these laws or any other governmental regulations that may apply to Chondrial, Chondrial may be subject to significant civil, criminal and administrative penalties, damages, fines and exclusion from government funded healthcare programs, such as Medicare and Medicaid, any of which could substantially disrupt Chondrial’s operations and would materially adversely affect Chondrial’s business, financial condition and results of operations. If any of the physicians or other providers or entities with whom Chondrial expects to do business is found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

Recently enacted and future legislation may increase the difficulty and cost for Chondrial to obtain regulatory approval of and commercialize Chondrial’s product candidates and affect the prices it may obtain.

The commercial potential for Chondrial’s approved products, if any, could be affected by changes in healthcare spending and policy in the United States and abroad. Chondrial operates in a highly regulated industry. New laws, regulations or judicial decisions or new interpretations of existing laws, regulations or decisions, related to healthcare availability, the method of delivery or payment for healthcare products and services could adversely affect Chondrial’s business, operations and financial condition.

For example, the ACA, has a significant impact on the healthcare industry. The ACA is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. The current presidential administration has indicated that enacting changes to the ACA is a legislative priority and has alternatively discussed repealing and replacing the ACA. While Congress has not passed repeal legislation to date, the Tax Act includes a provision that repealed the individual mandate, effective January 1, 2019. Further, on January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. On

 

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October 13, 2017, President Trump signed an Executive Order terminating the cost-sharing subsidies that reimburse insurers under the ACA. In addition, the Centers for Medicare and Medicaid Services (referred to as the “CMS”) has proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through these marketplaces. Congress will likely consider other legislation to replace elements of the ACA. Chondrial does not know at this time what implications these changes and other, proposed changes, if enacted, would have on the ACA’s current requirements or on Chondrial’s future business. Changes to the ACA or other existing health care regulations could significantly impact Chondrial’s business and the pharmaceutical industry.

In addition, on January 31, 2020, the United Kingdom exited from the European Union (referred to as “Brexit”). The effects of Brexit will depend on any agreements the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. Brexit could lead to legal uncertainty and potentially divergent national laws and regulation as the United Kingdom determines which European Union laws to replace or replicate.

Chondrial cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If Chondrial or its collaborators are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if Chondrial’s or its collaborators are not able to maintain regulatory compliance, CTI-1601 or any future product candidates may lose any marketing approval that may have been obtained and Chondrial may not achieve or sustain profitability, which would materially adversely affect its business, financial condition and results of operations.

Even if approved, reimbursement policies could limit Chondrial’s ability to sell product candidates that Chondrial elects to sell on its own.

If approved by regulatory authorities, market acceptance and sales of product candidates that Chondrial elects to sell on its own will depend on reimbursement policies and may be affected by healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels for those medications. Cost containment is a primary concern in the U.S. healthcare industry and elsewhere. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Chondrial cannot be sure that reimbursement will be available for CTI-1601 or future product candidates that Chondrial elects to sell on its own and, if reimbursement is available, the level of such reimbursement. Reimbursement may impact the demand for, or the price of, product candidates that Chondrial elects to sell on its own. If reimbursement is not available or is available only at limited levels, Chondrial may not be able to successfully commercialize product candidates that Chondrial elects to sell on its own.

In some foreign countries, particularly in Canada and European countries, the pricing of prescription pharmaceuticals is subject to strict governmental control. In these countries, pricing negotiations with governmental authorities can take six to 12 months or longer after the receipt of regulatory approval and product launch. To obtain favorable reimbursement for the indications sought or pricing approval in some countries, Chondrial may be required to conduct a clinical trial that compares the cost-effectiveness of product candidates that Chondrial elects to sell on its own with other available therapies. If reimbursement for product candidates that Chondrial elects to sell on its own is unavailable in any country in which Chondrial seeks reimbursement, if it is limited in scope or amount, if it is conditioned upon Chondrial’s completion of additional clinical trials, or if pricing is set at unsatisfactory levels, Chondrial’s business, financial conditions and results of operations could be materially adversely affected.

 

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Even if Chondrial obtains regulatory and marketing approval for a product candidate, Chondrial’s product candidates will remain subject to regulatory oversight.

Even if Chondrial receives marketing and regulatory approval for CTI-1601 or a future product candidate, regulatory authorities may still impose significant restrictions on the indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies. CTI-1601 or future product candidates will also be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping and submission of safety and other post-market information. The FDA has significant post-market authority, including, for example, the authority to require labeling changes based on new safety information and to require post-market studies or clinical trials to evaluate serious safety risks related to the use of a drug. Any regulatory approvals that Chondrial receives for CTI-1601 may also be subject to a REMS, limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including post-approval clinical trials, and surveillance to monitor the quality, safety and efficacy of the product, all of which could lead to lower sales volume and revenue. For example, the holder of an approved BLA or NDA is obligated to monitor and report adverse events and any failure of a product to meet the specifications in the BLA or NDA. The holder of an approved BLA or NDA also must submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal and state laws.

In addition, product manufacturers and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP requirements and adherence to commitments made in the BLA or NDA or foreign marketing application. If Chondrial, or a regulatory authority, discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured or disagrees with the promotion, marketing or labeling of that product, a regulatory authority may impose restrictions relative to that product, the manufacturing facility or Chondrial, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.

If Chondrial or its contractors fail to comply with applicable regulatory requirements following approval of CTI-1601, a regulatory authority may:

 

   

issue a warning letter asserting that Chondrial is in violation of the law;

 

   

request voluntary product recalls;

 

   

seek an injunction or impose administrative, civil or criminal penalties or monetary fines;

 

   

suspend or withdraw regulatory approval;

 

   

suspend any ongoing clinical trials;

 

   

refuse to approve a pending BLA or NDA or comparable foreign marketing application (or any supplements thereto) submitted by Chondrial or its strategic partners;

 

   

restrict the marketing or manufacturing of the product;

 

   

seize or detain the product or otherwise require the withdrawal of the product from the market;

 

   

refuse to permit the import or export of product candidates; or

 

   

refuse to allow Chondrial to enter into supply contracts, including government contracts.

Any government investigation of alleged violations of law could require Chondrial to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit Chondrial’s ability to commercialize CTI-1601 and adversely affect Chondrial’s business, financial condition, results of operations and prospects.

 

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In addition, the FDA’s policies, and those of equivalent foreign regulatory agencies, may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of CTI-1601. Chondrial cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If Chondrial is slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if Chondrial is not able to maintain regulatory compliance, Chondrial may lose any marketing approval that Chondrial may have obtained and Chondrial may not achieve or sustain profitability, which would materially and adversely affect Chondrial’s business, financial condition, results of operations and prospects.

Even if Chondrial receives marketing approval for CTI-1601 in the United States, Chondrial may never receive regulatory approval to market CTI-1601 outside of the United States.

Chondrial may pursue marketing approval for CTI-1601 in the United States, the European Union and in other countries worldwide. In order to market any product outside of the United States, Chondrial must establish and comply with the numerous and varying safety, efficacy and other regulatory requirements of other countries, including potential additional clinical trials and/or nonclinical studies. Approval procedures vary among countries and can involve additional testing and additional administrative review periods. The time required to obtain approvals in other countries might differ from that required to obtain FDA approval. The marketing approval processes in other countries may implicate all of the risks detailed above regarding FDA approval in the United States as well as other risks. In particular, in many countries outside of the United States, products must receive pricing and reimbursement approval before the product can be commercialized. Obtaining this approval can result in substantial delays in bringing products to market in such countries. Marketing approval in one country does not necessarily ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one country may have a negative effect on the regulatory process or commercial activities in others. Failure to obtain marketing approval in other countries or any delay or other setback in obtaining such approval would impair Chondrial’s ability to market a product candidate in such foreign markets. Any such impairment would reduce the size of Chondrial’s potential market, which could have a material adverse impact on Chondrial’s business, financial condition, results of operations and prospects.

Chondrial’s future growth depends, in part, on Chondrial’s ability to penetrate foreign markets, where Chondrial would be subject to additional regulatory burdens and other risks and uncertainties.

Chondrial’s future profitability will depend, in part, on Chondrial’s ability to commercialize CTI-1601 and future product candidates in foreign markets for which Chondrial may rely on collaborations with third parties. If Chondrial commercializes a product candidate in foreign markets, Chondrial would be subject to additional risks and uncertainties, including:

 

   

Chondrial’s customers’ ability to obtain reimbursement for a product candidate in foreign markets;

 

   

compliance with the Foreign Corrupt Practices Act of 1977 (referred to as the “FCPA”);

 

   

Chondrial’s inability to directly control commercial activities because Chondrial is relying on third parties;

 

   

the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements;

 

   

different medical practices and customs in foreign countries affecting acceptance in the marketplace;

 

   

import or export licensing requirements;

 

   

longer accounts receivable collection times;

 

   

longer lead times for shipping;

 

   

language barriers for technical training;

 

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reduced protection of intellectual property rights in some foreign countries;

 

   

foreign currency exchange rate fluctuations; and

 

   

the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.

Foreign sales of a product candidate could also be adversely affected by the imposition of governmental controls, political and economic instability, trade restrictions and changes in tariffs.

If Chondrial is unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell CTI-1601, Chondrial may not be able to generate any revenue.

Chondrial does not currently have an established infrastructure for the sales, marketing and distribution of biologic or drug products in the United States or foreign countries. In order to market a product candidate, if approved by the FDA or any other regulatory authority, Chondrial must build Chondrial’s sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. If Chondrial is unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, or if Chondrial is unable to do so on commercially reasonable terms, Chondrial’s business, results of operations, financial condition and prospects will be materially adversely affected.

Even if Chondrial receives marketing approval for CTI-1601, it may not achieve broad market acceptance, which would limit the revenue that Chondrial generates from its sales.

The commercial success of CTI-1601, if developed and approved for marketing by the FDA or EMA or other applicable regulatory authorities, will depend upon the awareness and acceptance of CTI-1601 among the medical community, including physicians, patients, advocacy groups and healthcare payors. Market acceptance of CTI-1601, if approved, will depend on a number of factors, including, among others:

 

   

the relative convenience and ease of subcutaneous injections as the necessary method of administration;

 

   

the prevalence and severity of any adverse side effects associated with CTI-1601;

 

   

limitations or warnings contained in the labeling approved for CTI-1601 by the FDA, EMA, or other regulatory authorities, such as a “black box” warning;

 

   

availability of alternative treatments, including any competitive Friedreich’s Ataxia therapies in development that could be approved or commercially launched prior to approval of CTI-1601;

 

   

the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

   

the strength of marketing and distribution support and timing of market introduction of competitive products;

 

   

publicity concerning Chondrial’s products or competing products and treatments;

 

   

pricing;

 

   

payor acceptance;

 

   

increased political pressure on pharmaceutical pricing;

 

   

increased pressure on orphan drug pricing for affected patient groups;

 

   

the impact of any future changes in U.S. healthcare, including medical financial assistance or a transition to a single-payer system;

 

   

the effectiveness of Chondrial’s sales and marketing strategies;

 

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Chondrial’s ability to increase awareness of CTI-1601 through marketing efforts;

 

   

Chondrial’s ability to obtain sufficient third-party coverage or reimbursement;

 

   

the willingness of patients to pay out-of-pocket in the absence of third-party coverage; and

 

   

the likelihood that the FDA may require development of a REMS, as a condition of approval or post-approval or may not agree with Chondrial’s proposed REMS or may impose additional requirements that limit the promotion, advertising, distribution or sales of Chondrial’s product candidates.

If CTI-1601 is approved but does not achieve an adequate level of acceptance by patients, advocacy groups, physicians and payors, Chondrial may not generate sufficient revenue from CTI-1601 to become or remain profitable and its business, financial condition and results of operations could be materially adversely affected. Chondrial’s efforts to educate the medical community and third-party payors about the benefits of CTI-1601 may require significant resources and may never be successful.

The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. If Chondrial is found to have improperly promoted off-label uses, Chondrial may become subject to significant liability.

The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products, such as CTI-1601 or any potential product candidates, if approved. If Chondrial receives marketing approval for CTI-1601, or any potential product candidates, physicians may prescribe Chondrial’s product candidates to their patients in a manner that is inconsistent with the approved label. If Chondrial is found to have promoted such off-label uses, Chondrial may become subject to significant liability. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion and required that they enter into corporate integrity agreements with the Office of Inspector General of the Department of Health and Human Services. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed. If Chondrial cannot successfully manage the promotion of CTI-1601 or any potential product candidates, if approved, Chondrial could become subject to significant liability, which would materially adversely affect Chondrial’s business, financial condition and results of operations.

Competing technologies could emerge, adversely affecting Chondrial’s opportunity to generate revenue from the sale of CTI-1601.

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Any new product that competes with an approved product may need to demonstrate compelling advantages in efficacy, convenience, tolerability and safety to be commercially successful. Other competitive factors, including biosimilar and gene therapy competition, could force Chondrial to lower prices or could result in reduced sales. In addition, new products developed by others could emerge as competitors to CTI-1601 or any other potential product candidates. If Chondrial is not able to compete effectively against Chondrial’s current and future competitors, Chondrial’s business will not grow and Chondrial’s financial condition and results of operations will be adversely affected.

Chondrial may face competition from biosimilars and may face increasing competition over time.

Chondrial may face competition from biosimilars in both the United States and Europe, and over time Chondrial may face increasing biosimilar competition. To the extent that governments adopt more permissive approval frameworks and competitors are able to obtain broader or expedited marketing approval for biosimilars, the rate of increased competition for Chondrial’s biologic drug products could accelerate. Expiration or successful challenge of applicable patent rights could trigger such competition, and Chondrial could face more

 

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litigation regarding the validity and/or scope of its patents. Chondrial’s products may also experience greater competition from lower-cost biosimilars or generics that come to market when branded products that compete with Chondrial’s products lose their own patent protection.

In the EU, the European Commission has granted marketing authorizations for biosimilars pursuant to a set of general and product class-specific guidelines for biosimilar approvals issued in 2005. In addition, in an effort to spur biosimilar utilization and/or increase potential healthcare savings, some EU countries have adopted biosimilar uptake measures such as requiring physician prescribing quotas or promoting switching or pharmacy substitution of biosimilars for the corresponding reference products, and other countries may adopt similar measures. Some EU countries may impose automatic price reductions upon market entry of the second or third biosimilar competitor.

In the United States, in 2010 the ACA authorized the FDA to approve biosimilars via a separate, abbreviated pathway. A growing number of companies have announced that they are in varying stages of development of biosimilar versions of existing biotechnology products. Some companies pursuing development of biosimilars may challenge Chondrial’s patents well in advance of the expiration of Chondrial’s material patents. The U.S. pathway includes the option for biosimilar products meeting certain criteria to be approved as interchangeable with their reference products. Some companies developing biosimilars may seek to register their products as interchangeable biologics, which could make it easier for prescribers or pharmacists to substitute those biosimilars for Chondrial’s products. In addition, critics of the 12-year exclusivity period in the biosimilar pathway law will likely continue to seek to shorten the data exclusivity period and/or to encourage the FDA to interpret narrowly the law’s provisions regarding which new products receive data exclusivity. While Chondrial is unable to predict the precise impact of biosimilars, Chondrial expects in the future for there to be greater competition in the United States as a result of biosimilars and downward pressure on product prices and sales. This additional competition could have a material adverse effect on Chondrial’s business, financial condition and results of operations.

Risks Related to Chondrial’s Business

If Chondrial is unable to manage expected growth in the scale and complexity of its operations, including attracting and hiring additional qualified management, its performance may suffer.

Chondrial is an early-stage clinical biotechnology company with a small number of employees, and Chondrial’s management systems currently in place are not likely to be adequate to support Chondrial’s future growth plans. As a result, Chondrial is highly dependent on Chondrial’s management and scientific personnel. The loss of the services of any of Chondrial’s executive officers, other key employees or consultants and other scientific advisors in the foreseeable future, might impede the achievement of Chondrial’s research, development and commercialization objectives. Chondrial relies on consultants and advisors, including scientific, nonclinical and clinical advisors, to assist it in formulating Chondrial’s development and commercialization strategy. These consultants and advisors may be employed by other employers and may have commitments under consulting or advisory contracts with other entities that may limit their availability to Chondrial. The loss of the services of Chondrial’s executive officers or other key employees could impede the achievement of Chondrial’s research, development and commercialization objectives and seriously harm its ability to successfully implement its business strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the competition for talent, particularly with the limited number of individuals in Chondrial’s industry with the breadth of skills and experience required to successfully develop, gain regulatory approval of and commercialize products.

Recruiting and retaining qualified scientific, medical clinical, manufacturing, quality assurance, regulatory, legal, public company financial, business, sales, marketing and commercial personnel and implementing and improving Chondrial’s operational, financial and management systems will be critical to Chondrial’s ability to grow and succeed. These demands also will require the hiring of additional executive or management-level

 

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personnel or the development of additional expertise by Chondrial’s senior management personnel. Hiring a significant number of additional employees, particularly those at the executive or management level, would increase Chondrial’s expenses significantly. In addition, Chondrial may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical companies for similar personnel. Chondrial also experiences competition for the hiring of scientific personnel from universities and research institutions. Moreover, delays or failures in clinical trials may also make it more challenging to recruit and retain qualified scientific personnel. If Chondrial is unable to continue to attract and retain high quality personnel, Chondrial’s ability to pursue its business strategy will be limited and its business, financial condition and results of operations would be adversely affected.

Further, if Chondrial fails to expand and enhance Chondrial’s operational, financial and management systems in conjunction with potential future growth, such failure could have a material adverse effect on Chondrial’s business, financial condition and results of operations. Chondrial may be unable to successfully implement these tasks on a larger scale and, accordingly, may not achieve Chondrial’s research, development, business and growth goals.

Chondrial has identified material weaknesses in its internal control over financial reporting. If Chondrial is unable to remediate these material weaknesses, or if Chondrial identifies additional material weaknesses in the future or otherwise fails to maintain an effective system of internal controls, Chondrial may not be able to accurately or timely report its financial condition or results of operations, which may adversely affect Chondrial’s business.

Chondrial has identified material weaknesses in its internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. If Chondrial is unable to remediate these material weaknesses, or if Chondrial identifies additional material weaknesses in the future or otherwise fails to maintain an effective system of internal controls, Chondrial may not be able to accurately or timely report its financial condition or results of operations.

The material weaknesses Chondrial identified were as follows:

 

   

Chondrial did not maintain an effective control environment commensurate with its financial reporting requirements. Chondrial 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 Chondrial’s inability to consistently establish appropriate authorities and responsibilities in pursuit of its financial reporting objectives, as demonstrated by, amongst other things, its insufficient segregation of duties in its finance and accounting functions. This material weakness contributed to the following material weakness.

 

   

Chondrial did not design and maintain adequate controls over the preparation and review of certain account reconciliations and journal entries. Specifically, Chondrial 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 Chondrial’s consolidated financial statements as of and for the years ended December 31, 2019 and 2018.

Each of these control deficiencies could result in a misstatement of Chondrial’s accounts or disclosures that would result in a material misstatement of our consolidated financial statements that would not be prevented or detected, and accordingly, Chondrial determined these control deficiencies constitute material weaknesses.

 

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Chondrial is in the process of implementing measures designed to improve its internal control over financial reporting and remediate the control deficiencies that led to this material weakness, including hiring additional finance and accounting personnel and initiating design and implementation of its financial control environment, including the establishment of formal accounting policies and procedures and period-end financial reporting controls. Chondrial cannot assure you that the measures Chondrial has taken to date, and actions Chondrial may take in the future, will be sufficient to remediate the control deficiencies that led to Chondrial’s material weaknesses in its internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. In addition, neither Chondrial’s management nor its independent registered public accounting firm has performed an evaluation of Chondrial’s internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been required. Had Chondrial or its independent registered public accounting firm performed an evaluation of Chondrial’s internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses may have been identified. If Chondrial is unable to successfully remediate its existing or any future material weaknesses in its internal control over financial reporting, or identify any additional material weaknesses, the accuracy and timing of Chondrial’s financial reporting may be adversely affected, Chondrial may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements and investors may lose confidence in Chondrial’s financial reporting.

Chondrial’s internal computer systems, or those of any contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of Chondrial’s product development programs.

Despite the implementation of security measures, Chondrial’s internal computer systems and those of third parties with which Chondrial contracts are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Any system failure, accident or security breach that causes interruptions in Chondrial’s operations could result in a material disruption of Chondrial’s product development programs and business operations, in addition to possibly requiring substantial expenditures of resources to remedy. For example, the loss of clinical trial data from completed clinical trials could result in delays in Chondrial’s regulatory approval efforts and significantly increase Chondrial’s costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss or damage to Chondrial’s data or applications, or inappropriate disclosure of confidential or proprietary information, Chondrial may incur liabilities and the further development of Chondrial’s product candidates may be delayed. In addition, Chondrial may not have adequate insurance coverage to provide compensation for any losses associated with such events.

Chondrial could be subject to risks caused by misappropriation, misuse, leakage, falsification or intentional or accidental release or loss of information maintained in the information systems and networks of Chondrial’s company, including personal information of Chondrial’s employees. In addition, outside parties may attempt to penetrate Chondrial’s systems or those of Chondrial’s vendors or fraudulently induce Chondrial’s employees or employees of Chondrial’s vendors to disclose sensitive information in order to gain access to Chondrial’s data. Like other companies, Chondrial may experience threats to Chondrial’s data and systems, including malicious codes and viruses, and other cyber-attacks. The number and complexity of these threats continue to increase over time. If a material breach of Chondrial’s security or that of Chondrial’s vendors occurs, the market perception of the effectiveness of Chondrial’s security measures could be harmed, Chondrial could lose business and Chondrial’s reputation and credibility could be damaged, all of which would materially adversely affect its business, financial condition and results of operations. Chondrial could be required to expend significant amounts of money and other resources to repair or replace information systems or networks. Although Chondrial develops and maintains systems and controls designed to prevent these events from occurring, the development and maintenance of these systems, controls and processes is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Moreover, despite Chondrial’s efforts, the possibility of these events occurring cannot be eliminated entirely.

 

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Chondrial may acquire businesses or products, or form strategic alliances, in the future, and Chondrial may not realize the benefits of such acquisitions or alliances.

Chondrial may acquire additional businesses or products, form strategic alliances or create joint ventures with third parties that it believes will complement or augment its existing business. If Chondrial acquires businesses with promising markets or technologies, Chondrial may not be able to realize the benefit of such transactions if it is unable to successfully integrate such businesses with its existing operations and company culture. Chondrial may encounter numerous difficulties in developing, manufacturing and marketing any new products resulting from a strategic alliance or acquisition that delays or prevents Chondrial from realizing their expected benefits or enhancing Chondrial’s business. Chondrial cannot be certain that, following any such transaction, Chondrial will achieve the expected synergies to justify the transaction and it could adversely affect its business, financial condition and results of operations.

Chondrial may seek to establish collaborations and, if it is not able to establish them on commercially reasonable terms, Chondrial may have to alter its development and commercialization plans or expand its internal efforts and growth.

Chondrial’s development programs and the potential commercialization of Chondrial’s product candidates will require substantial additional cash to fund expenses. For CTI-1601, and any future product candidates, Chondrial may decide to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of those product candidates in some or all markets.

Chondrial faces significant competition in seeking appropriate collaborators. Whether Chondrial reaches a definitive agreement for a collaboration for CTI-1601 or other potential product candidates will depend, among other things, upon Chondrial’s assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the applicable product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to Chondrial’s ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such collaboration could be more attractive than the one with Chondrial for Chondrial’s product candidate. The terms of any collaboration or other arrangements that Chondrial may establish may not be favorable to Chondrial.

Chondrial may also be restricted under existing license agreements from entering into future agreements on certain terms with potential collaborators. Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.

Chondrial may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If Chondrial is unable or unwilling to do so, Chondrial may have to curtail the development potential product candidates for which it is seeking to collaborate, reduce or delay its development program or one or more of its other development programs, delay potential commercialization in some or all markets or reduce the scope of any sales or marketing activities, or increase Chondrial’s expenditures and undertake development or commercialization activities at its own expense, including potentially increasing its infrastructure and investment outside the United States. If Chondrial elects to increase its expenditures to fund development or commercialization activities on its own, Chondrial will need to obtain additional capital, which may not be available to Chondrial on acceptable terms or at all. If it does not have sufficient funds, Chondrial may not be able to further develop its product candidates or bring them to market and generate product revenue. In addition, such efforts may require diversion of a disproportionate amount of Chondrial’s attention away from other

 

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day-to-day activities and require devotion of a substantial amount of Chondrial’s time to managing these activities.

In addition, any future collaborations that Chondrial enters into may not be successful. The success of Chondrial’s collaboration arrangements will depend heavily on the efforts and activities of its collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations. Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters can lead to delays in the development process or commercializing the applicable product candidate and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision-making authority. Collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party. Any such termination or expiration could adversely affect Chondrial’s business, financial condition, results of operations and could harm its business reputation.

Chondrial faces risks related to health epidemics and other outbreaks of communicable diseases, which could significantly disrupt its operations and may materially and adversely affect its business and financial conditions.

Chondrial’s business could be adversely impacted by the effects of the coronavirus or other epidemics. In December 2019, a novel strain of the coronavirus (COVID-19) emerged in China and the virus has now spread to several other countries. In an effort to halt the outbreak of COVID-19, governments of countries around the world, including the United States, China and several European Union member states, have placed significant travel restrictions or advisories on travel within their respective borders and have instituted shelter-in-place policies that have led to extended business closures. The extent to which the coronavirus and global efforts to contain its spread will impact Chondrial’s operations will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the outbreak and the actions taken to contain or treat the coronavirus outbreak. The continued spread of the coronavirus globally could materially and adversely impact Chondrial’s operations, including without limitation, its manufacturing and supply chain for CTI-1601 and ongoing and planned Phase 1 clinical trials, which are facing, and could continue to face, enrollment difficulties as hospitals or clinical trials sites experience closures. Chondrial is currently evaluating CTI-1601 in a SAD Phase 1 clinical trial in patients with Friedreich’s Ataxia. The first two cohorts of patients have completed the SAD clinical trial; however, due to the continued impact of COVID-19, Chondrial has delayed initiation of the next cohort in the SAD clinical trial. Chondrial is conducting the clinical trial 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. The travel advisories and risk of infection related to COVID-19 have presented increased risks to patients traveling to Chondrial’s clinical trial site for dosing. Due to the uncertainty surrounding COVID-19, Chondrial cannot estimate when the next cohort of patients will begin the clinical trial. While top line results from the SAD and MAD 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 may result in top line results being delayed until the first half of 2021. In addition, employee health and availability could be impacted, which may have a material and adverse effect on Chondrial’s business, financial condition and results of operations. A significant outbreak of coronavirus could also result in widespread global health crisis that could adversely affect global economies and financial markets resulting in an economic downturn that could have a material adverse effect on Chondrial’s business and prospects.

Compliance with global privacy and data security requirements could result in additional costs and liabilities to Chondrial or inhibit its ability to collect and process data globally, and the failure to comply with such requirements could expose it to criminal sanctions, civil penalties, contractual damages, reputational harm, administrative burdens and diminished profits and future earnings.

The regulatory framework for the collection, use, safeguarding, sharing, transfer and other processing of information worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Globally,

 

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virtually every jurisdiction in which Chondrial may operate has established its own data security and privacy frameworks with which Chondrial must comply. For example, the European Union’s General Data Protection Regulation 2016/679 (referred to as the “GDPR”) imposes strict obligations on the processing of personal data, including personal health data, and the free movement of such data. The GDPR applies to any company established in the European Union as well as any company outside the European Union that processes personal data in connection with the offering of goods or services to individuals in the European Union or the monitoring of their behavior. The GDPR enhances data protection obligations for processors and controllers of personal data, including, for example, obligations relating to: processing health and other sensitive data; obtaining consent of individuals; providing notice to individuals regarding data processing activities; responding to data subject requests; taking certain measures when engaging third-party processors; notifying data subjects and regulators of data breaches; implementing safeguards to protect the security and confidentiality of personal data; and transferring personal data to countries outside the European Union, including the United States. The GDPR imposes additional obligations and risks upon Chondrial’s business and substantially increases the penalties to which Chondrial could be subject in the event of any non-compliance, including fines of up to €20 million or 4% of total worldwide annual turnover, whichever is higher. The GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies and obtain compensation for damages. Given the breadth and depth of changes in data protection obligations, if Chondrial is required to comply with the GDPR’s requirements, Chondrial will be required to spend significant time and resources to review its technologies, systems and practices, as well as those of any third-party service providers, contractors or consultants that process or transfer personal data collected in the European Union. The GDPR and other changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, such as healthcare data or other personal information from Chondrial’s clinical trials, could require Chondrial to change its business practices or lead to government enforcement actions, private litigation or significant fines and penalties against Chondrial, reputational harm and could have a material adverse effect on Chondrial’s business, financial condition or results of operations.

Chondrial faces potential product liability exposure, and, if claims are brought against Chondrial, it may incur substantial liability.

The use of CTI-1601 and other potential product candidates in clinical trials, if any, and the sale of CTI-1601 and other potential product candidates, if developed and approved, exposes Chondrial to the risk of product liability claims. Product liability claims might be brought against Chondrial by patients, healthcare providers or others selling or otherwise coming into contact with CTI-1601 or other potential product candidates. For example, Chondrial may be sued if any product Chondrial develops allegedly causes injury or death or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, including as a result of interactions with alcohol or other drugs, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If Chondrial becomes subject to product liability claims and cannot successfully defend itself against them, Chondrial could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in, among other things:

 

   

withdrawal of patients from Chondrial’s clinical trials;

 

   

substantial monetary awards to patients or other claimants;

 

   

decreased demand for CTI-1601 or Chondrial’s other potential product candidates following marketing approval, if obtained;

 

   

damage to Chondrial’s reputation and exposure to adverse publicity;

 

   

increased FDA warnings on product labels;

 

   

voluntary product recalls, withdrawals, or labeling restrictions;

 

   

litigation costs;

 

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distraction of management’s attention from Chondrial’s primary business;

 

   

loss of revenue; and

 

   

the inability to successfully commercialize CTI-1601 or other potential product candidates, if approved.

Chondrial maintains product liability insurance coverage for its clinical trials with a $5 million aggregate coverage limit. Nevertheless, Chondrial’s insurance coverage may be insufficient to reimburse Chondrial for any expenses or losses Chondrial may suffer. Moreover, in the future, Chondrial may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect it against losses, including if insurance coverage becomes increasingly expensive. If Chondrial obtains marketing approval for CTI-1601 or other potential product candidates, Chondrial intends to expand its insurance coverage to include the sale of commercial products; however, it may not be able to obtain this product liability insurance on commercially reasonable terms. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. The cost of any product liability litigation or other proceedings, even if resolved in Chondrial’s favor, could be substantial, particularly in light of the size of Chondrial’s business and financial resources. A product liability claim or series of claims brought against Chondrial could cause its stock price to decline and, if Chondrial is unsuccessful in defending such a claim or claims and the resulting judgments exceed its insurance coverage, Chondrial’s financial condition, business, results of operations and prospects could be materially adversely affected.

Risks Related to Chondrial’s Reliance on Third Parties

Chondrial has limited experience in conducting or supervising clinical trials and must outsource all clinical trials. As a result, many important aspects of Chondrial’s drug development programs are outside of its direct control.

Chondrial has limited experience in conducting or supervising clinical trials that must be performed to obtain data to submit in concert with applications for approval by the FDA or the EMA. As a result, Chondrial expects to continue to rely on CROs, clinical data management organizations and consultants to design, conduct, supervise and monitor its nonclinical studies and clinical trials. Chondrial and its CROs are required to comply with various regulations, including the FDA’s regulations commonly referred to as good clinical practices (referred to as “GCPs”), which are enforced by regulatory agencies, including the FDA, and comparable foreign regulatory authorities to ensure the health, safety and rights of patients are protected in clinical development and clinical trials, and that trial data integrity is assured. Regulatory authorities ensure compliance with these requirements through periodic inspections of trial sponsors, principal investigators and clinical trial sites. Chondrial’s expected reliance on third parties that it does not control does not relieve it of these responsibilities and requirements. If Chondrial or any of its CROs fail to comply with applicable requirements, the clinical data generated in its clinical trials may be deemed unreliable and the FDA, the European Commission or other comparable foreign regulatory authorities may require Chondrial to perform additional clinical trials before approving its marketing applications. Chondrial cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of its clinical trials comply with such requirements. In addition, its clinical trials must be conducted with products produced under cGMP requirements, which mandate, among other things, the methods, facilities and controls used in manufacturing, processing and packaging of a drug product to ensure its safety and identity. Failure to comply with these regulations may require Chondrial to repeat nonclinical studies and/or clinical trials, which would delay the regulatory approval process, and could also subject Chondrial to enforcement action, up to and including, civil and criminal penalties, which would materially adversely affect Chondrial’s business, financial condition and results of operations.

Chondrial’s CROs are not its employees, and except for remedies available to it under its agreements with such CROs, it cannot control whether or not they devote sufficient time and resources to Chondrial’s ongoing clinical and preclinical programs. If CROs do not successfully carry out their contractual duties or obligations or

 

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meet expected deadlines or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to Chondrial’s clinical protocols, regulatory requirements or for other reasons, Chondrial’s clinical trials may be extended, delayed or terminated and it may not be able to obtain regulatory approval for or successfully commercialize its product candidates. As a result, Chondrial’s operations and the commercial prospects for its product candidates would be harmed, its costs could increase and its ability to generate revenue could be delayed or reduced. In addition, operations of Chondrial’s CROs could be affected by earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or man-made disasters or business interruptions. If their facilities are unable to operate because of an accident or incident, even for a short period of time, some or all of Chondrial’s research and development programs may be harmed or delayed and its operations and financial condition could suffer.

Chondrial has less direct control over the conduct, timing and completion of these clinical trials and the management of data developed through the clinical trials than would be the case if Chondrial were relying entirely upon Chondrial’s own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. These factors may materially adversely affect the willingness or ability of third parties to conduct Chondrial’s clinical trials and may subject Chondrial to unexpected cost increases that are beyond its control. Nevertheless, Chondrial is responsible for ensuring that each of its clinical trials is conducted in accordance with the applicable protocol, legal and regulatory requirements and scientific standards, and Chondrial’s reliance on CROs does not relieve it of its regulatory responsibilities.

Because Chondrial has relied on third parties, its internal capacity to perform these functions is limited. Outsourcing these functions involves risk that third parties may not perform to Chondrial’s standards, may not produce results in a timely manner or may fail to perform at all. Chondrial currently has a small number of employees, which limits the internal resources it has available to engage new third-party providers, if necessary, and monitor existing third-party providers. To the extent Chondrial is unable to engage new third-party providers, if necessary, and successfully manage the performance of third-party service providers in the future, its business may be adversely affected. Though Chondrial carefully manages its relationships with CROs, there can be no assurance that Chondrial will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on its business, financial condition, results of operation and prospects.

Chondrial relies on third-party supply and manufacturing partners for drug supplies for its research and development, nonclinical activities, and clinical activities, and may do the same for any commercial supplies of its product candidates.

Chondrial relies on third-party supply and manufacturing partners to supply the materials and components for, and manufacture, its research and development, nonclinical and clinical study drug substance and product. Chondrial has not yet manufactured or formulated any product candidate on a commercial scale and may not be able to do so for any of its product candidates. Chondrial will work to develop and optimize its manufacturing process, however Chondrial cannot be sure that the process will result in therapies that are safe, potent or effective.

Chondrial does not own manufacturing facilities or supply sources for such components, nonclinical and clinical study drug substance, product and materials, including devices that may be required for administration, but may develop these capabilities in the future. There can be no assurance that Chondrial’s supply of research and development, nonclinical and clinical development of drugs and other materials will not be limited, interrupted, restricted in certain geographic regions or will be of satisfactory quality or continue to be available at acceptable prices. In particular, replacement of any product formulation manufacturer Chondrial may engage could require significant effort and expertise because there may be a limited number of qualified replacements.

 

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In the event that any of Chondrial’s suppliers or manufacturers fails to perform its obligations to Chondrial in relation to quality, timing or otherwise, or if Chondrial’s supply of components or other materials becomes limited or interrupted for other reasons, Chondrial may be forced to manufacture the materials itself, for which Chondrial currently does not have the capabilities or resources, or enter into an agreement with another third party, which Chondrial may not be able to do on reasonable terms, if at all. In some cases, the technical skills or technology required to manufacture Chondrial’s product candidates may be unique or proprietary to the original manufacturer and Chondrial may have difficulty, or there may be contractual restrictions prohibiting Chondrial from, transferring such skills or technology to another third party and a feasible alternative may not exist. These factors would increase Chondrial’s reliance on such manufacturer or require Chondrial to obtain a license from such manufacturer in order to have another third party manufacture its product candidates. If Chondrial is required to change manufacturers for any reason, it will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification of a new manufacturer could negatively affect Chondrial’s ability to develop product candidates in a timely manner or within budget.

Chondrial also relies on third parties to store master and working cell banks. Chondrial currently has one master cell bank and one working cell bank for CTI-1601 and believes it would have adequate backup should any cell bank be lost in a catastrophic event. However, it is possible that Chondrial could lose multiple cell banks and have its manufacturing severely impacted by the need to replace the cell banks, which could materially and adversely affect Chondrial’s business, financial condition and results of operations

Chondrial may rely on third party manufacturers if it receives regulatory approval for any product candidate. To the extent that Chondrial has existing, or enters into future, manufacturing arrangements with third parties, it will depend on these third parties to perform their obligations in a timely manner consistent with contractual and regulatory requirements, including those related to quality control and assurance. If Chondrial is unable to obtain or maintain third-party manufacturing for product candidates, or to do so on commercially reasonable terms, Chondrial may not be able to develop and commercialize its product candidates successfully. Chondrial’s or a third party’s failure to execute on Chondrial’s manufacturing requirements could adversely affect Chondrial’s business, financial condition and results of operations in a number of ways, including:

 

   

an inability to initiate or continue clinical trials of product candidates under development;

 

   

delay in submitting regulatory applications, or receiving regulatory approvals, for product candidates;

 

   

loss of the cooperation of a collaborator;

 

   

subjecting Chondrial’s product candidates to additional inspections by regulatory authorities;

 

   

requirements to cease distribution or to recall batches of Chondrial’s product candidates; and

 

   

in the event of approval to market and commercialize a product candidate, an inability to meet commercial demands for Chondrial’s products.

Chondrial and its contract manufacturers are subject to significant regulation with respect to manufacturing Chondrial’s products. The manufacturing facilities on which Chondrial relies may not continue to meet regulatory requirements and have limited capacity.

All entities involved in the preparation of therapeutics for clinical trials or commercial sale, including Chondrial’s existing contract manufacturers for CTI-1601, are subject to extensive regulation. Some components of a finished therapeutic product approved for commercial sale or used in late-stage clinical trials must be manufactured in accordance with cGMP. These regulations govern manufacturing processes and procedures (including record keeping) and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes can lead to the introduction of adventitious agents or other contaminants, or to inadvertent changes in the properties or stability of Chondrial’s product candidates that may not be detectable in final product testing. Chondrial or its

 

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contract manufacturers must supply all necessary documentation in support of a BLA or NDA on a timely basis and where required, must adhere to the FDA’s or other regulator’s good laboratory practices (referred to as “GLPs”), and cGMP regulations enforced by the FDA or other regulator through facilities inspection programs. The facilities and quality systems of some or all of Chondrial’s third-party contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition of regulatory approval of CTI-1601 or any of Chondrial’s other potential products. In addition, the regulatory authorities may, at any time, audit or inspect a manufacturing facility involved with the preparation of CTI-1601 or Chondrial’s other potential products or the associated quality systems for compliance with the regulations applicable to the activities being conducted. If these facilities do not pass a pre-approval plant inspection, FDA or other regulatory approval of the products will not be granted.

The regulatory authorities also may, at any time following approval of a product for sale, audit the manufacturing facilities of Chondrial’s third-party contractors. If any such inspection or audit identifies a failure to comply with applicable regulations or if a violation of Chondrial’s product specifications or applicable regulations occurs independent of such an inspection or audit, Chondrial or the relevant regulatory authority may require remedial measures that may be costly and/or time-consuming for Chondrial or a third party to implement and that may include the temporary or permanent suspension of a clinical trial or commercial sales or the temporary or permanent closure of a facility. Any such remedial measures imposed upon Chondrial or third parties with whom Chondrial contract could materially harm Chondrial’s business.

If Chondrial or any of Chondrial’s third-party manufacturers fail to maintain regulatory compliance, the FDA or other regulators can impose regulatory sanctions including, among other things, refusal to approve a pending application for a biologic product, or revocation of a pre-existing approval. As a result, Chondrial’s business, financial condition and results of operations may be materially harmed.

Additionally, if supply from one approved manufacturer is interrupted, there could be a significant disruption in commercial supply. The number of manufacturers with the necessary manufacturing capabilities is limited. In addition, an alternative manufacturer would need to be qualified through a BLA or NDA supplement or similar regulatory submission which could result in further delay. The regulatory agencies may also require additional studies if a new manufacturer is relied upon for commercial production. The delays associated with the verification of a new manufacturer could negatively affect Chondrial’s ability to develop product candidates in a timely manner or within budget.

These factors could also cause the delay of manufacturing development, clinical trials, regulatory submissions, required approvals or commercialization of CTI-1601 or any other product candidates, cause Chondrial to incur higher costs and prevent Chondrial from commercializing Chondrial’s products successfully. Furthermore, if Chondrial’s suppliers fail to meet contractual requirements, and Chondrial is unable to secure one or more replacement suppliers capable of production at a substantially equivalent cost, Chondrial’s clinical trials may be delayed or Chondrial could lose potential revenues. Any of the above would materially adversely affect its business, financial condition and results of operations.

Chondrial enters into various contracts in the normal course of its business in which Chondrial indemnifies the other party to the contract. In the event Chondrial has to perform under these indemnification provisions, it could materially increase Chondrial’s costs and potential liability.

In the normal course of business, Chondrial periodically enters into academic, commercial, service, collaboration, licensing, consulting and other agreements that contain indemnification provisions. With respect to Chondrial’s academic and other research agreements, Chondrial typically indemnifies the institution and related parties from losses arising from claims relating to the products, processes or services made, used, sold or performed pursuant to the agreements for which Chondrial has secured licenses, and from claims arising from Chondrial’s or its sublicensees’ exercise of rights under the agreement. With respect to Chondrial’s collaboration and contract service agreements, Chondrial indemnifies its collaborators from any third-party product liability

 

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claims that could result from the production, use or consumption of the product, as well as for alleged infringements of any patent or other intellectual property right by a third party. With respect to consulting agreements, Chondrial indemnifies consultants from claims arising from the good faith performance of their consulting services.

Should Chondrial’s obligation under an indemnification provision exceed applicable insurance coverage or should Chondrial be denied insurance coverage, Chondrial’s business, financial condition and results of operations could be adversely affected. Similarly, if Chondrial is relying on a collaborator to indemnify Chondrial and the collaborator is denied insurance coverage or the indemnification obligation exceeds the applicable insurance coverage, and if the collaborator does not have other assets available to indemnify Chondrial, its business, financial condition and results of operations could be adversely affected.

To the extent Chondrial is able to enter into collaborative arrangements or strategic alliances, Chondrial may be exposed to risks related to those collaborations and alliances.

Biotechnology companies sometimes become dependent upon collaborative arrangements or strategic alliances to complete the development and commercialization of product candidates. If Chondrial elects to enter into collaborative arrangements or strategic alliances, these arrangements may place the development of its product candidates outside its control, may require it to relinquish important rights or may otherwise be on terms unfavorable to it, which could adversely affect Chondrial’s business, financial condition and results of operations.

Dependence on collaborative arrangements or strategic alliances would subject Chondrial to a number of risks, including the risk that:

 

   

Chondrial may not be able to control the amount and timing of resources that its collaborators may devote to the relevant product candidates;

 

   

Chondrial’s collaborators may experience financial difficulties;

 

   

Chondrial may be required to relinquish important rights, such as marketing and distribution rights;

 

   

business combinations or significant changes in a collaborator’s business strategy may also adversely affect a collaborator’s willingness or ability to complete its obligations under any arrangement;

 

   

a collaborator could independently move forward with a competing drug candidate developed either independently or in collaboration with others, including Chondrial’s competitors; and

 

   

collaborative arrangements are often terminated or allowed to expire, which would delay the development and may increase the cost of developing Chondrial’s drug candidates.

Risks Related to Chondrial’s Intellectual Property Rights

If Chondrial is unable to adequately protect its proprietary technology or maintain issued patents which are sufficient to protect CTI-1601 or potential product candidates, third parties could compete against Chondrial more directly, which would have a material adverse impact on Chondrial’s business, results of operations, financial condition and prospects.

Chondrial’s commercial success will depend in part on Chondrial’s success in obtaining and maintaining issued patents and other intellectual property rights in the United States and elsewhere and protecting Chondrial’s proprietary technology. If Chondrial does not adequately protect its intellectual property and proprietary technology, competitors may be able to use its technologies and erode or negate any competitive advantage Chondrial may have, which could harm Chondrial’s business and ability to achieve profitability.

With respect to Chondrial’s patent portfolio, Chondrial in-licenses from WFUHS certain issued U.S. patents that relate to CTI-1601 and its use for treating Friedreich’s Ataxia. Chondrial in-licenses from IU certain pending

 

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U.S. provisional patent applications that relate to the composition of CTI-1601 and methods of use, and certain U.S. patents relating to materials and methods relating to the development of CTI-1601. Chondrial also owns or co-owns pending U.S. provisional applications relating to methods of use of CTI-1601, biomarkers and to Chondrial’s platform technology.

In some cases, Chondrial has only filed provisional patent applications on certain aspects of Chondrial’s technologies and each of these provisional patent applications is not eligible to become an issued patent until, among other things, Chondrial files a non-provisional patent application within 12 months of the filing date of the applicable provisional patent application. Any failure to file a non-provisional patent application within this timeline could cause Chondrial to lose the ability to obtain patent protection for the inventions disclosed in the associated provisional patent applications.

With respect to both in-licensed and owned intellectual property, Chondrial cannot predict whether the patent applications Chondrial and its licensors are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient protection from competitors or other third parties.

Chondrial cannot provide any assurances that any of its pending patent applications that mature into issued patents will include claims with a scope sufficient to protect CTI-1601, or other potential product candidates. Other parties have developed technologies that may be related or competitive to Chondrial’s approach and may have filed or may file patent applications and may have received or may receive patents that may overlap or conflict with Chondrial’s patent applications, either by claiming the same methods or formulations or by claiming subject matter that could dominate Chondrial’s patent position. The patent positions of biotechnology and pharmaceutical companies, including Chondrial’s patent position, involve complex legal and factual questions, and, therefore, the issuance, scope, validity and enforceability of any patent claims that Chondrial may obtain cannot be predicted with certainty. Patents, if issued, may be challenged, deemed unenforceable, invalidated, or circumvented. U.S. patents and patent applications may also be subject to interference proceedings, ex parte reexamination, or inter partes review proceedings, supplemental examination and challenges in district court. Patents may be subjected to opposition, post-grant review, or comparable proceedings lodged in various foreign, both national and regional, patent offices. These proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents that Chondrial may own or exclusively license may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent right sought by Chondrial, which in turn could affect Chondrial’s ability to develop, market or otherwise commercialize CTI-1601, and other potential product candidates.

Furthermore, though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide Chondrial with adequate proprietary protection or competitive advantages against competitors with similar products. Competitors may also be able to design around Chondrial’s patents. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. The laws of some foreign countries do not protect Chondrial’s proprietary rights to the same extent as the laws of the United States, and Chondrial may encounter significant problems in protecting its proprietary rights in these countries. If these developments were to occur, they could have a material adverse effect on Chondrial’s potential future sales.

Chondrial’s ability to enforce its patent rights depends on its ability to detect infringement. It is difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. Any litigation to enforce or defend Chondrial’s patent rights, even if Chondrial were to prevail, could be costly and time-consuming and would divert the attention of Chondrial’s management and key personnel from its business operations. Chondrial may not prevail in any lawsuits that it initiates and the damages or other remedies awarded if Chondrial were to prevail may not be commercially meaningful.

 

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In addition, proceedings to enforce or defend Chondrial’s patents could put its patents at risk of being invalidated, held unenforceable, or interpreted narrowly. Such proceedings could also provoke third parties to assert claims against Chondrial, including that some or all of the claims in one or more of Chondrial’s patents are invalid or otherwise unenforceable. If any of Chondrial’s patents covering CTI-1601, are invalidated or found unenforceable, Chondrial’s financial position and results of operations would be materially and adversely impacted. In addition, if a court found that valid, enforceable patents held by third parties covered CTI-1601, Chondrial’s financial position and results of operations would also be materially and adversely impacted.

The degree of future protection for Chondrial’s proprietary rights is uncertain, and Chondrial cannot ensure that:

 

   

any of Chondrial’s patents, or any of Chondrial’s pending patent applications, if issued, will include claims having a scope sufficient to protect CTI-1601 or any other products or product candidates;

 

   

any of Chondrial’s pending patent applications will issue as patents;

 

   

Chondrial will be able to successfully develop and commercialize CTI-1601 if approved, before Chondrial’s relevant patents expire;

 

   

Chondrial was the first to make the inventions covered by each of Chondrial’s patents and pending patent applications;

 

   

Chondrial was the first to file patent applications for these inventions;

 

   

others will not develop similar or alternative technologies that do not infringe Chondrial’s patents;

 

   

any of Chondrial’s patents will be found to ultimately be valid and enforceable;

 

   

any patents issued to Chondrial will provide a basis for an exclusive market for Chondrial’s commercially viable products, will provide Chondrial with any competitive advantages or will not be challenged by third parties;

 

   

Chondrial will develop additional proprietary technologies or product candidates that are separately patentable; or

 

   

that Chondrial’s commercial activities or products will not infringe upon the patents of others.

Chondrial relies upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain its competitive position, which Chondrial seeks to protect, in part, by confidentiality agreements with its employees and Chondrial’s consultants. Chondrial also has agreements with its employees and selected consultants that obligate them to assign their inventions to its and has non-compete agreements with some, but not all, of its consultants. It is possible that technology relevant to Chondrial’s business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees and consultants who are parties to these agreements breach or violate the terms of these agreements, Chondrial may not have adequate remedies for any such breach or violation, and Chondrial could lose its trade secrets through such breaches or violations. Further, Chondrial’s trade secrets could otherwise become known or be independently discovered by its competitors. If Chondrial is unable to adequately protect its proprietary technology or maintain issued patents which are sufficient to protect CTI-1601 or potential future product candidates, third parties could compete against Chondrial more directly, which would have a material adverse impact on Chondrial’s business, results of operations, financial condition and prospects

Over time, Chondrial will lose its ability to rely upon the intellectual property Chondrial currently owns to prevent competing product, which may impair Chondrial’s ability to generate revenue.

Chondrial has in-licensed certain patents relating to CTI-1601 from WFUHS. The U.S. patents relating to CTI-1601 and its use for the treatment of Friedreich’s Ataxia expire in 2024 and 2025, respectively. Chondrial has also in-licensed certain provisional patent applications relating to the composition of CTI-1601 and methods

 

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of use from IU, which, if issued as a patent, would expire at the earliest in 2040. Chondrial cannot predict whether these provisional patent applications Chondrial and its licensors are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient protection from competitors or other third parties. When these various patents expire, Chondrial will be unable to use the patents to try to block others from marketing CTI-1601 in the United States.

In addition, given the amount of time required for the development, testing, and regulatory review of new product candidates, patents protecting such product candidates might expire before or shortly after such product candidates are commercialized. As a result, Chondrial’s intellectual property may not provide Chondrial with sufficient rights to exclude others from commercializing products similar or identical to Chondrial’s.

Once Chondrial’s patents expire, Chondrial will be subject to competition from third parties who will be able to use the intellectual property covered by these patents, which could impair its ability to generate revenue and could adversely affect its business, financial condition and results of operations.

Chondrial may infringe the intellectual property rights of others, which may prevent or delay Chondrial’s product development efforts and stop Chondrial from commercializing or increase the costs of commercializing CTI-1601 or other potential product candidates, if approved.

Chondrial’s success will depend in part on its ability to operate without infringing the intellectual property and proprietary rights of third parties. Chondrial cannot ensure that its business, products and methods do not or will not infringe the patents or other intellectual property rights of third parties.

The pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Third parties may allege that CTI-1601 or Chondrial’s other potential product candidates or the use of Chondrial’s technologies infringes patent claims or other intellectual property rights held by them or that Chondrial is employing their proprietary technology without authorization. Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome is uncertain. Any claim relating to intellectual property infringement that is successfully asserted against Chondrial may require it to pay substantial damages, including treble damages and attorneys’ fees if Chondrial is found to be willfully infringing another party’s patents, for past use of the asserted intellectual property and royalties and other consideration going forward if Chondrial is forced to take a license. In addition, if any such claim were successfully asserted against Chondrial and it could not obtain such a license, Chondrial may be forced to stop or delay developing, manufacturing, selling or otherwise commercializing CTI-1601.

Even if Chondrial is successful in these proceedings, it may incur substantial costs and divert management time and attention in pursuing these proceedings, which could have a material adverse effect on Chondrial. If Chondrial is unable to avoid infringing the patent rights of others, it may be required to seek a license, defend an infringement action or challenge the validity of the patents in court, or redesign Chondrial’s products. Patent litigation is costly and time consuming. Chondrial may not have sufficient resources to bring these actions to a successful conclusion. In addition, intellectual property litigation or claims could force Chondrial to do one or more of the following:

 

   

cease developing, selling or otherwise commercializing CTI-1601;

 

   

cease preparations or developing of Chondrial’s other potential product candidates;

 

   

pay substantial damages for past use of the asserted intellectual property;

 

   

obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; and

 

   

in the case of trademark claims, redesign or rename the trademarks or trade names of Chondrial’s product candidates to avoid infringing the intellectual property rights of third parties, which may not be possible and, even if possible, could be costly and time-consuming.

 

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Any of these risks coming to fruition could have a material adverse effect on Chondrial’s business, results of operations, financial condition and prospects.

Chondrial may be subject to claims challenging the inventorship or ownership of its patents and other intellectual property.

Chondrial may also be subject to claims that former employees or other third parties have an ownership interest in Chondrial’s patents or other intellectual property. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If Chondrial fails in defending any such claims, in addition to paying monetary damages, Chondrial may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on Chondrial’s business, financial condition and results of operations. Even if Chondrial is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Obtaining and maintaining Chondrial’s patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and Chondrial’s patent protection could be reduced or eliminated for non-compliance with these requirements.

The U.S. Patent and Trademark Office (referred to as the “U.S. PTO”) and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case, which would adversely affect Chondrial’s business, financial condition and results of operations.

Chondrial may be involved in lawsuits to protect or enforce its patents or the patents of Chondrial’s licensors, which could be expensive, time-consuming and unsuccessful.

Competitors may infringe Chondrial’s patents or the patents of Chondrial’s licensors. To counter infringement or unauthorized use, Chondrial may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of Chondrial’s or Chondrial’s licensors is not valid, is unenforceable and/or is not infringed, or may refuse to stop the other party from using the technology at issue on the grounds that Chondrial’s patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of Chondrial’s patents at risk of being invalidated or interpreted narrowly and could put Chondrial’s patent applications at risk of not issuing which could materially adversely affect its business, financial condition and results of operations.

Interference proceedings provoked by third parties or brought by Chondrial may be necessary to determine the priority of inventions with respect to Chondrial’s patents or patent applications or those of Chondrial’s licensors. An unfavorable outcome could require Chondrial to cease using the related technology or to attempt to license rights to it from the prevailing party. Chondrial’s business, financial condition and results of operations could be harmed if the prevailing party does not offer Chondrial a license on commercially reasonable terms. Chondrial’s defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract Chondrial’s management and other employees. Chondrial may not be able to prevent, alone or with Chondrial’s licensors, misappropriation of Chondrial’s intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States, which could adversely affect Chondrial’s business, financial condition and results of operations.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of Chondrial’s confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings,

 

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motions or other interim proceedings or developments. If investors perceive these results to be negative, it could have a material adverse effect on the price of Chondrial common stock.

Issued patents covering Chondrial’s product candidates could be found invalid or unenforceable if challenged in court.

If Chondrial or one of its licensing partners initiated legal proceedings against a third party to enforce a patent covering Chondrial’s product candidate, the defendant could counterclaim that the patent covering Chondrial’s product candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include alleged failures to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for unenforceability assertions include allegations that someone connected with prosecution of the patent withheld relevant information from the U.S. PTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review and equivalent proceedings in foreign jurisdictions, e.g., opposition proceedings. Such proceedings could result in revocation or amendment of Chondrial’s patents in such a way that they no longer cover Chondrial’s product candidates or competitive products. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example, Chondrial cannot ensure that there is no invalidating prior act, of which Chondrial and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, Chondrial would lose at least part, and perhaps all, of the patent protection on Chondrial’s product candidates. Such a loss of patent protection would have a material adverse impact on Chondrial’s business, financial condition, and results of operations.

Chondrial does not seek to protect its intellectual property rights in all jurisdictions throughout the world and Chondrial may not be able to adequately enforce its intellectual property rights even in the jurisdictions where Chondrial seeks protection.

Filing, prosecuting and defending patents on product candidates in all countries and jurisdictions throughout the world would be prohibitively expensive, and Chondrial’s intellectual property rights in some countries outside the United States could be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, Chondrial may not be able to prevent third parties from practicing Chondrial’s inventions in all countries outside the United States, or from selling or importing products made using Chondrial’s inventions in and into the United States or other jurisdictions. Competitors may use Chondrial’s technologies in jurisdictions where Chondrial has not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where Chondrial has patent protection, but enforcement is not as strong as that in the United States. These products may compete with Chondrial’s products and Chondrial’s patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for Chondrial to stop the infringement of its patents or marketing of competing products in violation of Chondrial’s proprietary rights generally. For example, an April 2014 report from the Office of the United States Trade Representative identified a number of countries, including India and China, where challenges to the procurement and enforcement of patent rights have been reported. Several countries, including India and China, have been listed in the report every year since 1989. Proceedings to enforce Chondrial’s patent rights in foreign jurisdictions could result in substantial costs and divert Chondrial’s efforts and attention from other aspects of Chondrial’s business, could put Chondrial’s patents at risk of being invalidated or interpreted narrowly, could put Chondrial’s patent applications at risk of not

 

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issuing and could provoke third parties to assert claims against Chondrial. Chondrial may not prevail in any lawsuits that it initiates and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, Chondrial’s efforts to enforce its intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that Chondrial develops or licenses, which would materially adversely affect its business, financial condition and results of operations.

Chondrial is dependent on licensed intellectual property for CTI-1601. If Chondrial were to lose its rights to licensed intellectual property, Chondrial may not be able to continue developing or commercializing CTI-1601, if approved.

Chondrial has an exclusive license with WFUHS, pursuant to which Chondrial exclusively licenses certain patent rights relating to the TAT-frataxin fusion protein and its use, on a worldwide basis. Chondrial has an exclusive license with IU, pursuant to which Chondrial exclusively licenses certain patent rights relating to CTI-1601 and its use for the treatment of mitochondrial diseases, on a worldwide basis. Chondrial may enter into additional licenses for third-party intellectual property that are necessary or useful to Chondrial’s business. Current or future licensors may also allege that Chondrial has breached its license agreement and may accordingly seek to terminate Chondrial’s license with them. In addition, current or future licensors may decide to terminate Chondrial’s license at will. If successful, this could result in loss of Chondrial’s right to use the licensed intellectual property, which could materially adversely affect its ability to develop and commercialize CTI-1601, if approved, as well as harm Chondrial’s competitive business position, its business prospects, financial condition and results of operations.

If Chondrial fails to comply with Chondrial’s obligations in the agreements under which Chondrial license intellectual property rights from third parties or otherwise experience disruptions to Chondrial’s business relationships with Chondrial’s licensors, Chondrial could lose license rights that are important to Chondrial’s business.

Chondrial license agreements with WFUHS and IU impose, and Chondrial expects its future license agreements will impose, various development, diligence, commercialization, and other obligations on Chondrial in order to maintain the licenses. In spite of Chondrial’s efforts, WFUHS, IU, or a future licensor might conclude that Chondrial has materially breached its obligations under such license agreements and seek to terminate the license agreements, thereby removing or limiting Chondrial’s ability to develop and commercialize products and technology covered by these license agreements. If these licenses are terminated, or if the underlying patent rights licensed thereunder fail to provide the intended exclusivity, competitors or other third parties would have the freedom to seek regulatory approval of, and to market, products identical to Chondrial’s and it may be required to cease its development and commercialization of certain of Chondrial’s product candidates or of CTI-1601. Any of the foregoing could have a material adverse effect on Chondrial’s competitive position, business, financial conditions, results of operations, and prospects.

Moreover, disputes may arise regarding intellectual property subject to a licensing agreement, including:

 

   

the scope of rights granted under the license agreement and other interpretation-related issues;

 

   

the extent to which Chondrial’s technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;

 

   

the sublicensing of patent and other rights under Chondrial’s collaborative development relationships;

 

   

Chondrial’s diligence obligations under the license agreement and what activities satisfy those diligence obligations;

 

   

the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property by Chondrial’s licensors and Chondrial and its partners;

 

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whether and the extent to which inventors are able to contest the assignment of their rights to Chondrial’s licensors; and

 

   

the priority of invention of patented technology.

The agreements under which Chondrial currently licenses intellectual property or technology from third parties are complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what Chondrial believes to be the scope of its rights to the relevant intellectual property or technology, or increase what Chondrial believes to be its financial or other obligations under the relevant agreement, either of which could have a material adverse effect on Chondrial’s business, financial condition, results of operations, and prospects. Moreover, if disputes over intellectual property that Chondrial has licensed prevent or impair Chondrial’s ability to maintain its current licensing arrangements on commercially acceptable terms, Chondrial may be unable to successfully develop and commercialize CTI-1601, which could have a material adverse effect on Chondrial’s business, financial conditions, results of operations, and prospects.

Some intellectual property may have been discovered through government funded programs and thus may be subject to federal regulations such as “march-in” rights, certain reporting requirements and a preference for U.S.-based companies. Compliance with such regulations may limit Chondrial’s exclusive rights, and limit Chondrial’s ability to contract with non-U.S. manufacturers.

Chondrial’s in-licensed patent rights from WFUHS and from IU were funded in part by the U.S. government and are therefore subject to certain federal regulations. When new technologies are developed with U.S. government funding, the U.S. government generally obtains certain rights in any resulting patents, including a non-exclusive license authorizing the U.S. government to use the invention or to have others use the invention on its behalf. The U.S. government’s rights may also permit it to disclose the funded inventions and technology to third parties and to exercise march in rights to use or allow third parties to use the technology Chondrial has licensed that was developed using U.S. government funding. The U.S. government may exercise its march in rights if it determines that action is necessary because Chondrial fails to achieve practical application of the government-funded technology, or because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry. In addition, Chondrial’s rights in such inventions may be subject to certain requirements to manufacture products embodying such inventions in the United States in certain circumstances and if this requirement is not waived. Any exercise by the U.S. government of such rights or by any third party of its reserved rights could have a material adverse effect on Chondrial’s competitive position, business, financial condition, results of operations, and prospects.

Chondrial has not yet registered trademarks for a commercial trade name for CTI-1601 or other potential product candidates and failure to secure such registrations could adversely affect Chondrial’s business, financial condition and results of operations.

Chondrial has not yet registered trademarks for a commercial trade name for CTI-1601 or other potential product candidates. Any future trademark applications may be rejected during trademark registration proceedings. Although Chondrial would be given an opportunity to respond to those rejections, Chondrial may be unable to overcome such rejections. In addition, the U.S. PTO and comparable agencies in many foreign jurisdictions give third parties an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against Chondrial’s trademarks, and Chondrial’s trademarks may not survive such proceedings. Moreover, any name Chondrial proposes to use with its product candidates in the United States must be approved by the FDA, regardless of whether Chondrial has registered it, or applied to register it, as a trademark. The FDA typically conducts a review of proposed product names, including an evaluation of potential for confusion with other product names. If the FDA objects to any of Chondrial’s proposed proprietary product names, Chondrial may be required to expend significant additional resources in an effort to identify a suitable substitute name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA.

 

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If Chondrial does not obtain additional protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent terms and obtaining data exclusivity for CTI-1601, Chondrial’s business may be materially harmed.

Depending upon the timing, duration and specifics of development and FDA marketing approval of CTI-1601 or Chondrial’s other potential product candidates, one or more of Chondrial’s U.S. patents may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, Chondrial may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than Chondrial requests. If Chondrial is unable to obtain patent term extension or restoration or the term of any such extension is less than Chondrial requests, Chondrial’s competitors may obtain approval of competing products following Chondrial’s patent expiration, and its ability to generate revenues, business, financial condition and results of operations could be materially adversely affected.

Chondrial’s proprietary rights may not adequately protect its technologies, which may adversely affect its position in the market, business, financial condition and results of operations.

Chondrial relies on unpatented trade secrets, know-how, and technology, which are difficult to protect, especially in the pharmaceutical industry, where much of the information about a product must be made public during the regulatory approval process. Chondrial seeks to protect trade secrets, in part, by entering into confidentiality agreements with employees, consultants and others. These parties may breach or terminate these agreements or may refuse to enter into such agreements with Chondrial, and Chondrial may not have adequate remedies for such breaches. Furthermore, these agreements may not provide meaningful protection for Chondrial’s trade secrets or other proprietary information or result in the effective assignment to Chondrial of intellectual property and may not provide an adequate remedy in the event of unauthorized use or disclosure of confidential information or other breaches of the agreements. Despite Chondrial’s efforts to protect its trade secrets, Chondrial or its board members, employees, consultants, contractors or scientific and other advisors may unintentionally or willfully disclose Chondrial’s proprietary information to competitors.

If Chondrial fails to maintain trade secret protection, its competitive position may be adversely affected. Competitors may also independently discover Chondrial’s trade secrets. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain. If Chondrial’s competitors independently develop equivalent knowledge, methods and know-how, Chondrial would not be able to assert its trade secrets against them and its business, financial condition and results of operations could be harmed.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing Chondrial’s ability to protect its products.

As is the case with other biopharmaceutical companies, Chondrial’s success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involves both technological and legal complexity and is therefore costly, time consuming and inherently uncertain. Changes in either the patent laws or interpretation of the patent laws in the United States could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. Patent reform legislation in the United States and other countries, including the Leahy-Smith America Invents Act (referred to as the “Leahy-Smith Act”) signed into law in September 2011, could increase those uncertainties and costs. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art and provide more efficient and cost-effective avenues for competitors to challenge the validity of patents. For

 

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example, the Leahy-Smith Act allows third-party submission of prior art to the U.S. PTO during patent prosecution and additional procedures to attack the validity of a patent by U.S. PTO administered post-grant proceedings, including post-grant review, inter partes review, and derivation proceedings. In addition, the Leahy-Smith Act has transformed the U.S. patent system from a “first-to-invent” system to a “first-to-file” system in which, assuming that other requirements for patentability are met, the first inventor to file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed invention. The first-to-file provisions, however, only became effective on March 16, 2013. Accordingly, it is not yet clear what, if any, impact the Leahy-Smith Act will have on the operation of Chondrial’s business. However, the Leahy-Smith Act and its implementation could make it more difficult to obtain patent protection for Chondrial’s inventions and increase the uncertainties and costs surrounding the prosecution of Chondrial’s or Chondrial’s collaboration partners’ patent applications and the enforcement or defense of Chondrial’s issued patents, all of which could harm Chondrial’s business, results of operations, financial condition and prospects.

The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. Additionally, there have been recent proposals for additional changes to the patent laws of the United States and other countries that, if adopted, could impact Chondrial’s ability to enforce Chondrial’s proprietary technology. Depending on future actions by the U.S. Congress, the U.S. courts, the U.S. PTO and the relevant law-making bodies in other countries, the laws and regulations governing patents could change in unpredictable ways that would weaken Chondrial’s ability to obtain new patents or to enforce Chondrial’s existing patents and patents that Chondrial might obtain in the future.

Chondrial may be subject to damages resulting from claims that Chondrial or Chondrial’s employees have wrongfully used or disclosed alleged trade secrets of their former employers.

Chondrial’s employees have been previously employed at other biotechnology or pharmaceutical companies, including Chondrial’s competitors or potential competitors. Although Chondrial is not aware of any claims currently pending against it, it may be subject to claims that Chondrial or Chondrial’s employees inadvertently or otherwise used or disclosed the trade secrets or other proprietary information of Chondrial’s employees’ former employers. Litigation may be necessary to defend against these claims. Even if Chondrial is successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If Chondrial fails in defending such claims, in addition to paying money claims, Chondrial may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent Chondrial’s ability to develop and commercialize CTI-1601 or Chondrial’s other potential product candidates, which would materially adversely affect Chondrial’s business, financial condition and results of operations.

Risks Related to the Combined Company

The combined company will incur losses for the foreseeable future and might never achieve profitability.

The combined company may never become profitable, even if the combined company is able to complete clinical development for one or more product candidates and eventually commercialize such product candidates. The combined company will need to successfully complete significant research, development, testing and regulatory compliance activities that, together with projected general and administrative expenses, is expected to result in substantial increased operating losses for at least the next several years. Even if the combined company does achieve profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis and may not continue as a going concern.

The combined company’s stock price is expected to be volatile, and the market price of its common stock may drop following the merger.

The market price of the combined company’s common stock following the merger could be subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical, biotechnology, and other life

 

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sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of the combined company’s common stock to fluctuate following the merger include:

 

   

the ability of the combined company to obtain regulatory approvals for product candidates, and delays or failures to obtain such approvals;

 

   

the failure of any of the combined company’s product candidates, if approved for marketing and commercialization, to achieve commercial success;

 

   

issues in manufacturing the combined company’s approved products, if any, or product candidates;

 

   

the results of current, and any future, nonclinical or clinical trials of the combined company’s product candidates;

 

   

the entry into, or termination of, key agreements, including key licensing or collaboration agreements;

 

   

the initiation of material developments in, or conclusion of, disputes or litigation to enforce or defend any of the combined company’s intellectual property rights or defend against the intellectual property rights of others;

 

   

announcements by commercial partners or competitors of new commercial products, clinical progress (or the lack thereof), significant contracts, commercial relationships, or capital commitments;

 

   

adverse publicity relating to the combined company’s markets, including with respect to other products and potential products in such markets;

 

   

the introduction of technological innovations or new therapies competing with potential products of the combined company;

 

   

the loss of key employees;

 

   

general and industry-specific economic conditions potentially affecting the combined company’s research and development expenditures;

 

   

changes in the structure of health care payment systems;

 

   

adverse regulatory decisions;

 

   

trading volume of the combined company’s common stock; and

 

   

period-to-period fluctuations in the combined company’s financial results.

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies or the biotechnology sector. These broad market fluctuations may also adversely affect the trading price of the combined company’s common stock.

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management’s attention and resources, which could significantly harm the combined company’s profitability and reputation.

The combined company must maintain effective internal controls over financial reporting, and if the combined company is unable to do so, the accuracy and timeliness of the combined company’s financial reporting may be adversely affected, which could have a material adverse effect on the combined company’s business and stock price.

Until December 31, 2019, Zafgen was an “emerging growth company,” as defined in the Jumpstart Our

Business Startups Act, and took advantage of certain exemptions from various reporting requirements that are applicable to other companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.

 

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The combined company must maintain effective internal control over financial reporting in order to accurately and timely report its results of operations and financial condition. In addition, as a public company, the Sarbanes-Oxley Act requires, among other things, that the combined company assess the effectiveness of its disclosure controls and procedures quarterly and the effectiveness of the combined company’s internal control over financial reporting at the end of each fiscal year.

The rules governing the standards that must be met for the combined company management to assess the combined company’s internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act are complex and require significant documentation, testing and possible remediation. These stringent standards require that the combined company’s audit committee be advised and regularly updated on management’s review of internal control over financial reporting.

Chondrial has identified material weaknesses in its internal control over financial reporting. See “Risk Factors—Risks Related to Chondrial—Chondrial has identified material weaknesses in its internal control over financial reporting. If Chondrial is unable to remediate these material weaknesses, or if Chondrial identifies additional material weaknesses in the future or otherwise fails to maintain an effective system of internal controls, Chondrial may not be able to accurately or timely report its financial condition or results of operations, which may adversely affect Chondrial’s business.” Chondrial is in the process of implementing measures designed to improve its internal control over financial reporting and remediate the control deficiencies that led to this material weakness, including hiring additional finance and accounting personnel and initiating design and implementation of its financial control environment, including the establishment of formal accounting policies and procedures and period-end financial reporting controls. The combined company will continue this process.

The combined company’s management may not be able to effectively and timely implement controls and procedures that adequately remediate Chondrial’s material weaknesses and respond to the increased regulatory compliance and reporting requirements that are applicable to the combined company as a public company. If the combined company fails to staff the combined company’s accounting, finance and information technology functions adequately or maintain internal control over financial reporting adequate to meet the demands that will be placed upon the combined company as a public company, including the requirements of the Sarbanes-Oxley Act, or to otherwise remediate Chondrial’s existing or any future material weaknesses in internal control over financial reporting, or identify any additional material weaknesses the combined company’s business and reputation may be harmed and its stock price may decline. Furthermore, investor perceptions of the combined company may be adversely affected, which could cause a decline in the market price of its common stock.

Financial reporting obligations of being a public company in the United States are expensive and time-consuming, and the combined company’s management will be required to devote substantial time to compliance matters.

As a publicly-traded company, the combined company will incur significant additional legal, accounting and other expenses that Chondrial did not incur as a privately-held company. The obligations of being a public company in the United States requires significant expenditures and will place significant demands on the combined company’s management and other personnel, including costs resulting from public company reporting obligations under the Exchange Act and the rules and regulations regarding corporate governance practices, including those under the Sarbanes-Oxley Act of 2002 (referred to as the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (referred to as the “Dodd-Frank Act”) and the listing requirements of the stock exchange on which the combined company’s securities are listed. These rules require the establishment and maintenance of effective disclosure and financial controls and procedures, internal control over financial reporting and changes in corporate governance practices, among many other complex rules that are often difficult to implement, monitor and maintain compliance with. Moreover, despite recent reforms made possible by the Tax Act, the reporting requirements, rules, and regulations will make some activities more time-consuming and costly. In addition, the combined company expects these rules and regulations to make it more difficult and more expensive for the combined company to obtain director and officer liability insurance and the

 

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combined company may be required to incur substantial costs to maintain the same or similar coverage that Chondrial had as a privately-held company. For example, Chondrial’s management has identified material weaknesses in Chondrial’s internal control over financial reporting. The combined company’s management and other personnel will need to devote a substantial amount of time to remedy the identified material weaknesses and otherwise ensure that the combined company comply with all of these requirements and to keep pace with new regulations, otherwise the combined company may fall out of compliance and risk becoming subject to litigation or being delisted, among other potential problems.

The sale or availability for sale of a substantial number of shares of common stock of the combined company after the merger and after expiration of applicable lock-up periods could adversely affect the market price of such shares after the merger.

Sales of a substantial number of shares of common stock of the combined company in the public market after the merger or after expiration of applicable lock-up periods and other legal restrictions on resale, or the perception that these sales could occur, could adversely affect the market price of such shares and could materially impair the combined company’s ability to raise capital through equity offerings in the future. Zafgen and Chondrial are unable to predict what effect, if any, market sales of securities held by significant stockholders, directors or officers of the combined company or the availability of these securities for future sale will have on the market price of the combined company’s common stock after the merger.

Ownership of the combined company’s common stock may be highly concentrated, and it may prevent other stockholders from influencing significant corporate decisions.

Upon completion of the merger, Holdings’ members are estimated to beneficially own or control approximately 60% of the combined company, on a fully-diluted basis. Accordingly Holdings’ members will have substantial influence over the outcome of a corporate action of the combined company requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of the combined company’s assets or any other significant corporate transaction. These stockholders also may exert influence in delaying or preventing a change in control of the combined company, even if such change in control would benefit the other stockholders of the combined company.

The combined company will continue to be a smaller reporting company. The combined company cannot be certain whether the reduced disclosure requirements applicable to smaller reporting companies will make the combined company’s common shares less attractive to investors or otherwise limit the combined company’s ability to raise additional funds.

Zafgen is currently, and the combined company will continue to be upon completion of the merger, a “smaller reporting company” under applicable securities regulations. A smaller reporting company is a company that, as of the last business day of its most recently completed second fiscal quarter, has an aggregate market value of the company’s voting stock held by non-affiliates, or public float, of less than $250 million, or has less than $100 million in annual revenues and either no public float or public float of less than $700 million. SEC rules provide that companies with a non-affiliate public float of less than $75 million may only sell shares under a Form S-3 shelf registration statement, during any 12-month period, in an amount less than or equal to one-third of the public float. If the combined company does not meet this public float requirement, any offering by the combined company under a Form S-3 will be limited to raising an aggregate of one-third of the combined company’s public float in any 12-month period. In addition, a smaller reporting company is able to provide simplified executive compensation disclosures in its filings, is exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that an independent registered public accounting firm provide an attestation report on the effectiveness of internal control over financial reporting if its public float is less than $75 million, and has certain other reduced disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in annual reports. Reduced disclosure in the combined company’s SEC filings due to its status as a smaller reporting company may make it harder for investors to analyze its results of operations and financial prospects.

 

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Anti-takeover provisions in the combined company’s charter documents and under Delaware law could make an acquisition of the combined company more difficult and may prevent attempts by the combined company’s stockholders to replace or remove the combined company’s management.

Provisions in the combined company’s certificate of incorporation and bylaws may delay or prevent an acquisition or a change in management. These provisions include a classified board of directors, a prohibition on actions by written consent of the combined company’s stockholders, and the ability of the board of directors to issue preferred stock without stockholder approval. In addition, because the combined company will be incorporated in Delaware, it is governed by the provisions of Section 203 of the Delaware General Corporations Law (referred to as the “DGCL”), which prohibits stockholders owning in excess of 15% of the outstanding combined company’s voting stock from merging or combining with the combined company. Although Zafgen and Chondrial believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with the combined company’s board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by the combined company’s stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.

Zafgen and Chondrial do not anticipate that the combined company will pay any cash dividends in the foreseeable future.

The current expectation is the combined company will retain its future earnings to fund the development and growth of the combined company’s business. As a result, capital appreciation, if any, of the combined company’s common stock will be stockholders’ sole source of gain, if any, for the foreseeable future.

The combined company’s employees may engage in misconduct or other improper activities, including violating applicable regulatory standards and requirements or engaging in insider trading, which could significantly harm the combined company’s business.

The combined company is exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with the regulations of the FDA and applicable non-U.S. regulators, provide accurate information to the FDA and applicable non-U.S. regulators, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to the combined company. Employees may also unintentionally or willfully disclose the combined company’s proprietary and/or confidential information to competitors. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of, including trading on, information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to the combined company’s reputation. The combined company is expected to adopt a code of conduct, but it is not always possible to identify and deter employee misconduct, and the precautions the combined company takes to detect and prevent this activity may be ineffective in controlling unknown or unmanaged risks or losses or in protecting the combined company from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against the combined company, and the combined company is not successful in defending itself or asserting its rights, those actions could have a significant impact on the combined company’s business, including the imposition of significant fines or other sanctions.

 

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Unfavorable global economic conditions could adversely affect the combined company’s business, financial condition or results of operations.

The combined company’s results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. A severe or prolonged economic downturn could result in a variety of risks to the combined company’s business, including, weakened demand for the combined company’s product candidates and the combined company’s ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain the combined company’s suppliers, possibly resulting in supply disruption, or cause the combined company’s customers to delay making payments for its services. Any of the foregoing could harm the combined company’s business and the combined company cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact its business.

 

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CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement, and the documents incorporated by reference into this proxy statement, contains “forward-looking” statements within the meaning of Section 21E of the U.S. Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, known as the PSLRA. These statements, as they relate to Zafgen or Chondrial, the management of either such company or the proposed transaction between Zafgen and Chondrial, involve risks and uncertainties that may cause results to differ materially from those set forth in the statements. These statements are based on current plans, estimates and projections, and therefore, you are cautioned not to place undue reliance on them. These statements may discuss goals, intentions and expectations as to future plans, trends, events, results of operations or financial condition, or otherwise, based on current beliefs of the management of Zafgen, as well as assumptions made by, and information currently available to management. No forward-looking statement can be guaranteed, and actual results may differ materially from those projected. Zafgen and Chondrial undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by law. Forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about the business and future financial results of the pharmaceutical industry, and other legal, regulatory and economic developments. We use words such as “anticipates,” “believes,” “plans,” “expects,” “projects,” “future,” “intends,” “may,” “will,” “should,” “could,” “estimates,” “predicts,” “potential,” “continue,” “guidance,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including, but not limited to, those described in the documents Zafgen has filed with the SEC as well as the possibility that (1) the parties may be unable to obtain stockholder or regulatory approvals required for the proposed transaction or may be required to accept conditions that could reduce the anticipated benefits of the merger as a condition to obtaining regulatory approvals; (2) the length of time necessary to consummate the proposed transaction may be longer than anticipated; (3) the parties may not be able to satisfy the conditions precedent to consummate the proposed transaction; (4) the proposed transaction may divert management’s attention from Zafgen’s ongoing business operations; (5) the anticipated benefits of the proposed transaction might not be achieved; (6) Chondrial’s clinical programs and nonclinical studies may not be successful or completed on time; (7) Chondrial may not be able to successfully demonstrate safety and efficacy of its clinical programs or nonclinical studies; (8) Chondrial’s expectations regarding the future development of its clinical programs and nonclinical studies may not materialize; (9) Chondrial’s clinical programs may not obtain necessary regulatory or other approvals; (10) Chondrial may not be able to raise the necessary capital to conduct Chondrial’s clinical programs and nonclinical studies or such capital may not be available; (11) the proposed transaction may involve unexpected costs; (12) risk that as a result of adjustments to the exchange ratio, Zafgen stockholders and Chondrial’s stockholder could own more or less of the combined company than is currently anticipated; (13) risks related to the market price of Zafgen common stock relative to the exchange ratio; (14) the parties may be unable to meet expectations regarding the timing, completion and accounting and tax treatments of the transaction; (15) the parties may be subject to risks related to the proposed transaction, including any legal proceedings related to the proposed transaction and the general risks associated with the respective businesses of Zafgen and Chondrial, including the general volatility of the capital markets, terms and deployment of capital, volatility of Zafgen share prices, changes in the biotechnology industry, interest rates or the general economy, underperformance of Zafgen’s or Chondrial’s assets and investments, decreased ability to raise funds and the degree and nature of Zafgen’s and Chondrial’s competition, as well as the risk that unexpected reductions in Zafgen’s cash balance could adversely affect the portion of the combined company that the Zafgen stockholders retain; or (16) activist investors might not approve of the proposed transaction. Additionally, forward-looking statements related to Chondrial’s future expectations are subject to numerous risks and uncertainties, including risks that planned development milestones and timelines will not be met. Neither Zafgen nor Chondrial gives any assurance that either Zafgen or Chondrial will achieve its expectations.

The foregoing list of factors is not exhaustive. You should carefully consider the foregoing factors and the other risks and uncertainties that affect the businesses of Zafgen described in the “Risk Factors” section of this

 

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proxy statement, Zafgen’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other documents filed by Zafgen from time to time with the SEC. All forward-looking statements included in this proxy statement are based upon information available to Zafgen and Chondrial the date hereof, and neither Zafgen nor Chondrial assumes any obligation to update or revise any such forward-looking statements.

All forward-looking statements included in this proxy statement are based upon information available to Zafgen and Chondrial on the date hereof. If any of these risks or uncertainties materialize or any of these assumptions prove incorrect, the results of operations of Zafgen, Chondrial or the combined company could differ materially from the forward-looking statements. All forward-looking statements in this proxy statement are current only as of the date on which the statements were made. Zafgen and Chondrial do not undertake any obligation to publicly update any forward-looking statements to reflect events or circumstances after the date on which any statement is made, the occurrence of unanticipated events or any new information that becomes available in the future.

 

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THE MERGER

This section and the section entitled “The Merger Agreement” beginning on page [] of this proxy statement describe the material aspects of the merger, including the merger agreement. While Zafgen believes that this description covers the material terms of the merger and the merger agreement, it may not contain all of the information that is important to you. You should read carefully this entire proxy statement, including the merger agreement, which is attached as Annex A to this proxy statement, and the other documents to which Zafgen has referred to or incorporated by reference herein. For a more detailed description of where you can find those other documents, please see the section entitled “Where You Can Find Additional Information” beginning on page [] of this proxy statement.

Background of the Merger

The following chronology summarizes the key meetings and events that led to the signing of the merger agreement. The following chronology does not purport to catalogue every conversation among the Zafgen Board, the Transaction Committee (as defined below), members of Zafgen management or Zafgen’s representatives and other parties.

Prior to September 2019, Zafgen was a clinical-stage biopharmaceutical company that was developing a novel class of MetAP2 inhibitors for the treatment of metabolic diseases. As discussed below, in September 2019, Zafgen announced that it did not believe it could resolve a clinical hold instituted by the FDA in the near-term and that Zafgen would focus on evaluating strategic alternatives.

From time to time the Zafgen Board, together with Zafgen management, has considered various strategic business initiatives intended to strengthen its business and enhance stockholder value. These have included licensing or acquiring rights to product candidates, divesting certain product candidates or businesses, or acquisitions of, or mergers with, other companies with other products, product candidates or technologies.

On November 26, 2018, Zafgen announced that the FDA had placed a clinical hold on the IND application for Zafgen’s first U.S. clinical trial of ZGN-1061, Zafgen’s second-generation, investigational MetAP2 inhibitor for the treatment of type 2 diabetes. Zafgen also announced that it planned to request a Type A meeting with the FDA to discuss next steps with the program. On November 26, 2018, the closing price of Zafgen’s common stock was $5.41, which represented a 41% decline from the previous trading day’s closing price of $9.10.

On March 11, 2019, Zafgen announced its fourth quarter and full year 2018 operating and financial results. Zafgen also announced its decision to suspend plans to file an IND application for ZGN-1258, Zafgen’s candidate for rare metabolic disorders due to unexpected findings from rodent toxicology studies. On March 12, 2019, the closing price of Zafgen’s common stock was $2.89, which represented a 37% decline from the previous trading day’s closing price of $4.60.

On April 23, 2019, Zafgen held a Type A meeting with the FDA regarding the clinical hold on ZGN-1061, at which Zafgen presented in vitro data.

On May 30, 2019, Zafgen announced the receipt of minutes from the Type A meeting with the FDA and that Zafgen was working with the FDA to agree upon an in vivo animal model developed by Zafgen to confirm the safety of ZGN-1061 (referred to as the “animal safety study”). On May 30, 2019, the closing price of Zafgen’s common stock was $1.91, which represented a 20% decline from the previous trading day’s closing price of $2.39.

During the first half of 2019, the Zafgen Board held meetings at which it discussed the strategic, financial and operational challenges of operating Zafgen’s business given the uncertainty of the timeline and results of the animal safety study and whether the FDA would remove the clinical hold on ZGN-1061, as well as Zafgen’s

 

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suspension of plans to file an IND for ZGN-1258. The Zafgen Board also discussed the risks and challenges facing Zafgen as a result of its cash burn levels and declining cash position. In addition, the Zafgen Board also reviewed the strategic alternatives that may have been available to Zafgen, including the potential risks and benefits of licensing or acquiring rights to product candidates, divesting certain product candidates or businesses, or a possible strategic merger or reverse merger with another company, each with a view towards enhancing value for Zafgen’s stockholders. A reverse merger, which represents a transaction in which a Zafgen subsidiary would merge with and into another company, with Zafgen surviving as the parent company and the other company continuing as a Zafgen subsidiary, was considered as a potential transaction structure, given Zafgen’s cash and its status as a public company. The Zafgen Board also had discussed with Goodwin Procter LLP (referred to as “Goodwin”), Zafgen’s outside legal counsel, the Zafgen Board’s fiduciary duties in the context of Zafgen entering into discussions with one or more third parties relating to a potential strategic transaction. In addition, the Zafgen Board had discussed the advisability of engaging a financial advisor to assist the Zafgen Board in evaluating strategic alternatives, including any interest that might be received in connection with a strategic process, as well as Zafgen’s business and prospects as a standalone company.

By June 2019, as authorized by the Zafgen Board, management had discussions with potentially interested companies primarily regarding Zafgen licensing or acquiring rights to product candidates or acquisitions of other products, product candidates or technologies. Ultimately, no definitive proposals were received that the Zafgen Board believed would enhance stockholder value.

In July 2019, Zafgen management discussed with representatives of MTS Health Partners, L.P. (referred to as “MTS”) Zafgen’s situation and prospects and the possibility of MTS acting as its financial advisor in evaluating strategic alternatives that might be available to Zafgen considering the risks and challenges facing Zafgen described above. Zafgen considered MTS as a potential financial advisor to assist and advise Zafgen given, among other things, MTS’s qualifications, experience and reputation, its knowledge of and involvement in recent transactions in the life sciences industry and its familiarity with Zafgen. In view of these considerations, Zafgen engaged MTS in September 2019, pursuant to an engagement letter dated September 3, 2019, to assist the Zafgen Board in exploring and evaluating a broad range of strategic and financial alternatives to enhance stockholder value, including a possible reverse merger or strategic merger.

From July through August 2019, at the direction of the Zafgen Board, management and MTS conducted a broad search of potential strategic opportunities which overlapped therapeutically with Zafgen and its MetAP2 inhibitor programs in the rare disease, metabolic, liver, fibrosis and inflammation spaces. Ultimately, no definitive proposals were received that the Zafgen Board believed would enhance stockholder value.

In August 2019, the Zafgen Board established an advisory transaction committee (referred to as the “Transaction Committee”), for convenience in order to assist the Zafgen Board in exploring potential strategic alternatives, including a possible business combination transaction. Peter Barrett, Ph.D., Thomas O. Daniel, M.D. and Frank E. Thomas, all of whom are non-management, independent directors, and have significant experience with merger and acquisition transactions were appointed to the Transaction Committee. The Zafgen Board authorized the Transaction Committee to oversee the exploration of strategic alternatives, and, in between meetings of the Zafgen Board, to give direction to Zafgen’s financial and legal advisors and to lead on behalf of Zafgen (or to give guidance to Zafgen’s representatives in connection with) any negotiations with potentially interested parties and periodically to brief the Zafgen Board on the status of the exploration of strategic alternatives. Throughout the Transaction Committee’s evaluation of proposals for a strategic transaction involving Zafgen, the Transaction Committee conducted formal meetings, but its members were also in regular informal communication with Zafgen’s Chief Executive Officer, representatives of Zafgen’s financial and legal advisors and with each other.

On September 3, 2019, the Zafgen Board held a meeting with members of Zafgen management and representatives of Goodwin present. Zafgen’s Chief Executive Officer provided an update on the animal safety study and the FDA’s concerns related to the study. The Zafgen Board discussed the risks, challenges, and

 

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strategic opportunities facing Zafgen taking into consideration the results of the animal safety study and Zafgen’s near-term cash requirements. The Zafgen Board also discussed that Zafgen had not found an opportunity to license or acquire rights to product candidates that the Zafgen Board believed would enhance stockholder value. Following discussion, the Zafgen Board concluded that it was unlikely that the clinical hold on ZGN-1061 would be resolved in the near term and therefore it was in the best interests of stockholders for Zafgen to explore its broader strategic alternatives, including a reverse merger, strategic merger and remaining as an independent company. The Zafgen Board directed management to publicly announce that Zafgen would be exploring strategic alternatives in conjunction with the public announcement that the clinical hold on ZGN-1061 was unlikely to be resolved.

On September 5, 2019, Zafgen issued a press release announcing that the preliminary results for the animal safety study were unlikely to resolve the ZGN-1061 clinical hold in a timely manner. The press release also announced that, as a result, the Zafgen Board planned to explore a range of strategic options to enhance stockholder value, and that it had retained MTS as its financial advisor to assist in the strategic review process. The press release also referenced Zafgen’s recently implemented plans to reduce operating expenses and prioritize key resources, including a workforce reduction and operational changes to preserve cash.

Following the September 5, 2019 press release, at the direction of the Zafgen Board, management and MTS proactively reached out to, and responded to inbound interest on behalf of, potential merger counterparties, as discussed below. Also following the September 5, 2019 press release, Zafgen halted all further development activities of MetAP2 inhibitors and withdrew the IND for ZGN-1061.

On September 19, 2019, Zafgen disclosed that it had received a letter from NASDAQ advising that for the 30 consecutive preceding trading days, the bid price of Zafgen’s common stock had closed below the $1.00 per share minimum required for continued listing on NASDAQ, and that Zafgen would have 180 days to regain compliance with the NASDAQ rules.

On September 23, 2019, Zafgen and Chondrial entered into a mutual confidentiality agreement that did not include a standstill provision.

On September 24, 2019, the Zafgen Board met to discuss, among other things, the strategic process. Members of Zafgen management and representatives of MTS were present. Representatives of MTS provided an update on the strategic process. Representatives of MTS also described its extensive screening process of companies, which included the aforementioned broad search of potential strategic opportunities which overlapped therapeutically with Zafgen and its MetAP2 inhibitor programs in the rare disease, metabolic, liver, fibrosis and inflammation spaces, as well as outreach to a broad list of top tier venture capital firms which might have portfolio companies potentially looking to go public through a reverse merger, a review of current, soon-to-be and previously-filed initial public offering candidates, input from Zafgen management and directors and inbound interest resulting from Zafgen’s September 5, 2019, public announcement to consider strategic alternatives. Zafgen management then described the methodology and criteria that was and would be used to narrow the universe of potential counterparties to those who would be solicited to submit a non-binding first round proposal, which included an evaluation of each candidate, including scientific, regulatory, commercial and other business determinations. Representatives of MTS discussed the proposed timetable for the strategic process and soliciting proposals from the selected companies. Following discussion, the Zafgen Board directed MTS and Zafgen management to narrow the list of potential counterparties as discussed at the meeting and approved the timetable discussed at the meeting. Management provided an update on Zafgen’s restructuring activities, cash forecast and financial outlook for Zafgen, including that all non-executive research and clinical personnel would be terminated by the end of that month. The Zafgen Board and management discussed Zafgen’s cash burn and cash position and that to maximize its cash position relative to the proposals, Zafgen should target executing a merger agreement by December 17, 2019 to best position itself to close a transaction by the end of March 2020. The directors also discussed the NASDAQ delisting notice.

 

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Following the meeting, in accordance with the directions from the Zafgen Board, MTS and Zafgen management narrowed the list of potential merger candidates based on the criteria discussed at the September 24, 2019 Zafgen Board meeting. In total, during the months of September and October 2019, from an initial universe of over 100 companies, the list was narrowed to 42 potential merger candidates, and MTS sent these 42 companies a form of mutual confidentiality agreement on behalf of Zafgen and invited these companies to express an interest in a strategic transaction with Zafgen. Forty of these companies executed a mutual confidentiality agreement with Zafgen. All of these mutual confidentiality agreements, including those executed by four private companies referred to as “Companies A, B, C and D,” and Chondrial, did not include any standstill provisions, except that two confidentiality agreements included customary standstill obligations that automatically terminated upon Zafgen’s announcement of the execution of a definitive agreement with a third party to effect a change of control of Zafgen.

Beginning on September 26, 2019, MTS sent each of the 40 companies that executed a mutual confidentiality agreement a first-round process letter, including Companies A, B, C and D, and Chondrial. The majority of process letters set a deadline of October 10, 2019 for the submission of non-binding written proposals, though some parties that expressed interest later in the process received process letters with later submission deadlines. The process letters outlined criteria for Zafgen’s evaluation of merger opportunities as well as other topics to be addressed in any proposals submitted. The process letters indicated that assuming a strategic transaction closed by March 2020, Zafgen’s expected available net cash balance would be approximately $40 million. The process letters also indicated that following evaluation of initial proposals, Zafgen expected to select a limited number of companies to engage in further diligence and be invited to present in-person to the Zafgen Board on November 4 and 5, 2019.

Of the 40 companies to which MTS sent process letters, 33 companies (including Companies A, B, C and D, and Chondrial) submitted first round non-binding written proposals, which described why the particular company believed it would be a good merger partner for Zafgen, a description and current presentation outlining its business opportunity, the competitive landscape, its technology, its management needs, its preliminary valuation splits for a potential merger with Zafgen, its cash forecasts, whether any additional capital would need to be raised before reaching its next set of key milestones, including the amount of any such capital, if required, and certain other matters relevant to any potential transaction, including any required regulatory approvals.

On October 10, 2019, Chondrial submitted a preliminary non-binding written proposal that provided for, among other things, a 66.6% and 33.3% ownership split for Chondrial and Zafgen equityholders in the post-closing company. Chondrial’s proposal indicated an assumed $45 million valuation of Zafgen assuming a Zafgen net cash balance of approximately $40 million on a projected closing date of March 31, 2020, and $5 million for the other assets of Zafgen. Chondrial’s proposal also indicated an assumed $90 million valuation of Chondrial, and to the extent that the closing date of the transaction is later than March 31, 2020, the ownership split would be adjusted to account for the additional equity capital required to fund Chondrial. Under Chondrial’s proposal, the number of shares of Zafgen common stock to be issued to Chondrial’s sole stockholder at the closing of the merger would be determined based on an exchange ratio calculated based on the total number of outstanding shares of Zafgen common stock and Chondrial common stock, each on a fully-diluted basis, and the assumed valuations of Chondrial and Zafgen.

On October 15, 2019, the Zafgen Board met to discuss, among other things, the first-round proposals. Members of Zafgen management and representatives of MTS and Goodwin were present. Management and representatives of MTS discussed the companies and the first-round proposals, including the diligence review of companies conducted by management and the companies’ perceived level of interest in a strategic transaction with Zafgen. Based on the criteria discussed at the previous Zafgen Board meetings, the Zafgen Board ultimately decided to invite ten companies to proceed to the next round of the strategic process, which would involve mutual diligence between Zafgen and each of the selected companies as well as an in-person presentation to the Zafgen Board and management by each selected company. Companies A, B, C and D, and Chondrial were included in the ten selected companies, all of which had executed mutual confidentiality agreements with Zafgen

 

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that did not contain standstill provisions. At the conclusion of the meeting, the independent directors participating in the meeting met in executive session to further discuss the strategic process.

On October 18, 2019, as directed by the Zafgen Board, representatives of MTS sent a process letter to each of the ten companies invited to participate in the next round of the strategic process, which outlined the expectations for the presentations to the Zafgen Board, specific questions from initial due diligence performed by Zafgen and the next steps in the strategic process.

Beginning on October 23, 2019, each of the ten companies were provided access to an online data room containing nonpublic information regarding Zafgen (Chondrial was provided access beginning on October 23, 2019).

From October 15 through November 3, 2019, Zafgen management continued its due diligence review of the ten companies.

On October 30 and 31, 2019, two of the ten companies selected to present to the Zafgen Board notified representatives of MTS that they were withdrawing from the strategic process. One company indicated that it was withdrawing to enter into exclusive discussions with a third party regarding a potential strategic transaction. The other company indicated that it was withdrawing due to a refocusing of its strategic plan.

On November 4 and 5, 2019, each of the eight companies, including Companies A, B, C and D, and Chondrial, presented detailed information to the Zafgen Board and management in Boston, Massachusetts on their drug development candidates, including clinical, regulatory, preclinical, intellectual property, and market opportunity information, commercial assessment work, financial models, management synergies, valuation, potential ownership splits and rationale for a reverse merger with Zafgen, as well as key milestones and cash projections to achieve these milestones.

On November 5, 2019, the Zafgen Board met to discuss, among other things, the selection of finalists to participate in more in-depth diligence review and discussions regarding a possible reverse merger with Zafgen. Members of Zafgen management and representatives of MTS and Goodwin were present. The Zafgen Board discussed, with the assistance of representatives of MTS and management, the presentations by each of the eight companies and management discussed its diligence findings to date related to the eight companies. Based on the discussions at this meeting and the criteria discussed at the previous Zafgen Board meetings, the Zafgen Board narrowed the selection of possible reverse merger partners to five companies—Companies A, B, C and D, and Chondrial. The Zafgen Board determined that these five companies be moved to the final round of the strategic process and directed MTS to seek best and final proposals from these five companies, which would include a mark-up of Zafgen’s proposed draft merger agreement. The Zafgen Board, however, discussed that in the case of Company D, certain operational changes would need to be agreed to between Zafgen and Company D before Company D would be allowed to submit a final proposal. The Zafgen Board also discussed Zafgen’s cash burn and cash position and that to maximize its cash position relative to the proposals, Zafgen should target executing a merger agreement by December 17, 2019 to best position itself to close a transaction by the end of March 2020.

From November 8 through 12, 2019, representatives of MTS sent a draft reverse merger agreement to Companies A, B and C, and Chondrial, and instructed the companies to submit their best and final proposals and a mark-up of the merger agreement by November 18, 2019.

On November 12, 2019, after several discussions between representatives of MTS, Zafgen management, the Transaction Committee and Company D and its advisors, Zafgen determined that Company D was unlikely to agree to the proposed operational changes and Company D was therefore removed from the process.

From November 14 through 22, 2019, representatives of Goodwin discussed with each of the Zafgen directors information concerning their fiduciary duties in connection with Zafgen potentially effecting a change

 

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of control via a merger with another company, including whether any director had any relationship with any of the merger candidates. Dr. Barrett, a partner in Atlas Venture, disclosed that Atlas Venture had an equity position in Company B.

On November 18, 2019, Companies A and B, and Chondrial submitted best and final non-binding proposals for a reverse merger transaction with Zafgen. Company B and Chondrial also concurrently with their proposals submitted a revised draft of the merger agreement. Company A’s proposal provided for a 77% and 23% ownership split for the Company A and Zafgen equityholders in the post-closing company, assuming a Zafgen net cash balance of $38 million. Company B’s proposal provided for a 63% and 37% ownership split for the Company B and Zafgen equityholders in the post-closing company, assuming a Zafgen net cash balance of $40 million. Chondrial’s proposal provided for a 60% and 40% ownership split for Chondrial and Zafgen equityholders in the post-closing company. Chondrial’s proposal indicated an assumed $45 million valuation of Zafgen assuming a Zafgen net cash balance of $40 million on March 31, 2020, and $5 million for the other assets of Zafgen. Chondrial’s proposal also indicated an assumed $67.5 million valuation of Chondrial, and to the extent that the closing date of the transaction is later than March 31, 2020, the ownership split would be adjusted to account for the additional equity capital required to fund Chondrial and/or the reduced cash balance of Zafgen. Under Chondrial’s proposal, the number of shares of Zafgen common stock to be issued to Chondrial’s sole stockholder at the closing of the merger would be determined based on an exchange ratio calculated based on the total number of outstanding shares of Zafgen common stock and Chondrial common stock, each on a fully-diluted basis, and the assumed valuations of Chondrial and Zafgen. Chondrial’s proposal also indicated that its sole stockholder’s majority owner, investment funds affiliated with Deerfield Management (referred to as “Deerfield”), would continue to fund Chondrial in accordance with its business plan through the closing of the proposed transaction with Zafgen. Company C declined to submit a revised proposal or a revised merger agreement by November 18, 2019 and instead reiterated its indication of interest (which provided for a 81.6% and 18.4% ownership split for the Company C and Zafgen equityholders in the post-closing company), and stated that upon being granted an exclusive negotiation period with Zafgen, it would meet with Zafgen to determine a path forward for completing its diligence and submitting a revised draft of the merger agreement.

Following receipt of these proposals, as authorized by the Transaction Committee, representatives of MTS followed up with each of the parties to clarify certain aspects of their proposals. During their discussion with Company A, representatives of MTS encouraged Company A to submit a revised draft of the merger agreement before the Zafgen Board was scheduled to meet to consider the final proposals on November 26, 2019. During their discussion with Company C, representatives of MTS encouraged Company C to submit an improved proposal and revised draft of the merger agreement before November 26, 2019, which Company C did not do.

On November 25, 2019, Company A submitted a revised draft of the merger agreement.

On November 26, 2019, the Zafgen Board met to discuss, among other things, the reverse merger proposals. Members of Zafgen management and representatives of Goodwin were present, and representatives of MTS were present for a portion of the meeting. Dr. Barrett recused himself from discussions about Company B and was not present at the meeting. Representatives of Goodwin reviewed with the Zafgen Board the affirmative steps taken regarding Dr. Barrett’s disclosure to the Zafgen Board of Atlas Venture’s equity interest in Company B and that Dr. Barrett had recused himself from Zafgen Board meetings and other discussions regarding the strategic process until such time as Company B was no longer involved in the strategic process.

Before representatives of MTS joined the meeting, representatives of Goodwin discussed with the Zafgen Board the disclosure that MTS provided regarding its relationships with Companies A, B and C, and Chondrial. The MTS disclosure indicated that MTS did not have any relationships with any of Companies A, B or C. Representatives of Goodwin discussed that MTS had previously informed Zafgen management and the Zafgen Board that prior to being engaged by Zafgen, MTS was engaged by Chondrial to provide financial advisory services, including with respect to potential future equity financing transactions and that, in connection with this engagement, MTS would provide financial advisory services to Chondrial in connection with equity financing

 

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related to the reverse merger with Zafgen; however, MTS would not act as financial advisor to Chondrial with respect to the proposed merger with Zafgen, no member of the MTS team advising Zafgen was also advising Chondrial and MTS would not receive any fees from Chondrial that are contingent upon the consummation of the proposed merger with Zafgen. Following review of this information, the Zafgen Board determined, with input from Goodwin, that based on the information provided by MTS and the condition that no member of the MTS team advising Zafgen would also advise Chondrial, MTS’s engagement by Chondrial would not impact MTS’s ability to act effectively as financial advisor to Zafgen or Zafgen’s decision to continue to retain MTS. (For more information see the section titled “The Merger—Opinion of Zafgen’s Financial Advisor”).

Representatives of MTS then joined the meeting and provided an update on the discussions with Companies A, B and C, and Chondrial, and their perceived levels of interest in a transaction with Zafgen. Zafgen management provided an update on Zafgen’s cash burn and cash position. Zafgen management also provided an update on the due diligence conducted on each of the four companies. Representatives of Goodwin reviewed the respective terms of the revised draft merger agreements related to each of the proposals. Representatives of Goodwin provided an overview of the fiduciary duties of Zafgen’s directors and the legal standards applicable to their decisions and actions in evaluating and responding to the proposals and the Zafgen Board’s consideration of any alternatives, including remaining as a standalone company. The Zafgen Board and management reviewed the merits of a possible business combination with each of the four companies, including strategic fit, long term growth platform, short- and long-term financial benefits, cultural fit and views of the strengths of the various companies, and other factors affecting whether to enter into a reverse merger transaction with each of the companies. The Zafgen Board discussed that Company C had declined to submit an improved proposal and revised merger agreement and its perceived level of interest was lower than the other companies, and concluded that for these reasons and based on the criteria previously discussed by the Zafgen Board, Company C should be excluded from further consideration. Following discussion, management recommended Chondrial as the most attractive reverse merger partner. The Zafgen Board believed that the level of ownership for Zafgen stockholders being proposed by each of Companies A and B, and Chondrial could be in a range that would provide substantial value to Zafgen’s stockholders, and that it had received the best and final proposals from each of Companies A and B, and Chondrial. The Zafgen Board concluded that based on the criteria and the discussions at the board meetings, Chondrial’s proposal represented the best alternative to further enhance stockholder value. The Zafgen Board directed MTS to inform Chondrial that it was selected to enter into a reverse merger transaction with Zafgen provided that the parties could reach agreement on certain key provisions in Chondrial’s revised draft of the merger agreement, including that Chondrial would receive funding from Deerfield necessary for Chondrial to execute its business plan through closing, and that the parties would work to finalize the merger agreement by December 17, 2019. The Zafgen Board also directed MTS, following indication from Chondrial that it would agree to the conditions discussed above, to inform Companies A, B and C that the Zafgen Board had selected another party for a strategic transaction. The Zafgen Board also instructed Zafgen management, representatives of MTS and Goodwin to work with Chondrial and its representatives to finalize the merger agreement and related documents by December 17, 2019.

On November 27, 2019, as directed by the Zafgen Board, representatives of MTS had a discussion with Chondrial’s Chief Executive Officer and informed her that the Zafgen Board had determined to move forward with Chondrial provided that the parties could reach agreement on certain key provisions in Chondrial’s revised draft of the merger agreement, including that Chondrial would receive funding from Deerfield necessary for Chondrial to execute its business plan through closing, and that the parties would work to finalize the merger agreement by December 17, 2019. Chondrial’s Chief Executive Officer indicated that Chondrial would work expeditiously with Zafgen to satisfy the Zafgen Board’s conditions. Following this discussion, representatives of MTS sent to Chondrial a list of the key provisions in Chondrial’s revised draft of the merger agreement that would need to be resolved to Zafgen’s satisfaction.

Also on November 27, 2019, Goodwin provided a revised draft of the merger agreement to Chondrial’s outside counsel.

 

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From November 28 through December 17, 2019, representatives of Zafgen, MTS, Goodwin, Chondrial and its outside counsel, Deerfield and its outside counsel, Brown Rudnick LLP (referred to as “Brown Rudnick”) had various telephonic meetings to finalize the confirmatory due diligence of the parties and discuss open points in the merger agreement and related documents.

On December 1, 2019, as authorized by the Zafgen Board, Zafgen’s Chief Executive Officer had a discussion with a representative of Deerfield regarding the status of the merger agreement discussions generally and the potential composition of the board of directors of the post-closing company. The possibility of Zafgen’s Chief Financial Officer continuing as a consultant with the post-closing company to assist with public company financial and compliance matters was also discussed.

On December 3, 2019, Chondrial provided responses to Zafgen’s November 27, 2019 list of the key merger agreement provisions. Representatives of MTS, Goodwin, and Zafgen management discussed Chondrial’s responses, and determined the responses were acceptable to continue discussions with Chondrial and inform Companies A, B and C that the Zafgen Board had selected another party for a strategic transaction.

From December 3 through 4, 2019, as directed by the Zafgen Board, MTS had discussions with each of Companies A, B and C, and informed them that Zafgen had selected another company with which to pursue a strategic transaction and that they would no longer be involved in Zafgen’s strategic process. Following notice to Company B that it was no longer involved in the strategic process, Dr. Barrett was no longer recused from the strategic process.

From December 4 through December 17, 2019, representatives of Goodwin, at the direction of the Zafgen Board and with input from Zafgen management and with the benefit of the views of the directors provided at the Zafgen Board and Transaction Committee meetings, Chondrial’s outside counsel and Brown Rudnick exchanged drafts and participated in discussions regarding the terms of the merger agreement and related documents. The items negotiated with respect to the merger agreement and related documents included, among other things: the representations and warranties to be made by the parties; the restrictions on the conduct of the parties’ businesses until completion of the transaction; the definitions of material adverse effect; the conditions to completion of the merger, including the required minimum net cash balances of each of the parties; the determination of Zafgen’s net cash balance at closing; the manner by which Zafgen would issue shares of its common stock to Chondrial’s stockholder as consideration for the merger; Deerfield’s obligation to fund Chondrial’s operations in accordance with its business plan until completion of the transaction; the provisions regarding Zafgen’s employee benefit plans, severance and other compensation matters; the composition of the board of directors of the post-closing company; the remedies available to each party under the merger agreement, including the triggers of the termination fee and expense reimbursement payable to each of the parties; the amounts of the termination fees and expense reimbursements; and which equityholders of each of the parties would be required to execute voting agreements concurrent with the execution of the merger agreement.

During these discussions, the parties discussed the impact that closing the merger after March 31, 2020 would have on the exchange ratio that was based on an assumed $45 million valuation of Zafgen assuming a Zafgen net cash balance of $40 million on March 31, 2020, and $5 million for the other assets of Zafgen and an assumed $67.5 million valuation of Chondrial. The parties agreed that if the closing occurred following March 31, 2020, Zafgen’s expected net cash balance should be reduced from $40 million to account for Zafgen’s cash spend through the closing, and likewise, Chondrial’s valuation should be increased by the amount that Deerfield funded Chondrial’s operations in accordance with its business plan following March 31, 2020 through the closing. The parties calculated a per day amount for these adjustments by dividing each of the Zafgen and Chondrial budgets for April and May 2020 by the aggregate number of days in those months. This resulted in the parties agreeing that Zafgen’s net cash closing balance, and consequently its assumed valuation, would be reduced by $21,311 per day beginning on March 31, 2020 through the closing date, and that Chondrial’s valuation would be increased by $111,656 per day beginning on March 31, 2020 through the closing date.

 

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On December 12, 2019, the Transaction Committee held a meeting with members of Zafgen management and representatives of MTS and Goodwin present. Management and representatives of MTS and Goodwin provided an update on the merger agreement discussions with Chondrial, Deerfield and their respective representatives. The Transaction Committee also discussed the potential composition of the board of directors of the post-closing company. The Transaction Committee provided feedback to Zafgen management, MTS and Goodwin regarding the key open points in the merger agreement and directed them to finalize the merger agreement and related documentation with Chondrial and Deerfield by December 17, 2019.

Also at the meeting, management discussed an analysis of a potential liquidation of Zafgen prepared by Zafgen management and had previously been provided to the Transaction Committee, including the potential timeline for liquidation and an estimate, subject to various assumptions, of the aggregate and per share amount that would be distributable to Zafgen stockholders in this scenario (which is summarized below under the section titled “—Opinion of MTS Securities—Zafgen Valuation Analysis,” and referred to as the “liquidation plan”). In the context of reviewing the liquidation plan, the Transaction Committee discussed the risks, challenges, and strategic opportunities facing Zafgen. Following discussion and questions of management regarding various matters relating to the liquidation plan, including the assumptions on which the liquidation plan was based, the Transaction Committee approved the liquidation plan for use by MTS in conducting its financial analyses of Zafgen.

On December 13, 2019, Zafgen entered into a confidentiality agreement with affiliates of Atlas Venture that were Zafgen stockholders, which did not contain a standstill provision, to facilitate discussions regarding such stockholders entering into a customary voting agreement and lock-up agreement concurrent with the execution of the merger agreement.

On December 17, 2019, the Zafgen Board held a meeting at Zafgen’s headquarters in Boston, Massachusetts to discuss the terms of the proposed transaction with Chondrial. Members of management and representatives of MTS and Goodwin were present. Management discussed the findings of its confirmatory due diligence of Chondrial. This discussion included the findings that in the course of Chondrial’s 90-day toxicology study for CTI-1601 conducted in non-human primates (referred to as “NHPs”), Chondrial had observed occasional transient rigidity immediately after dosing in certain NHPs, that these NHPs required no intervention and continued dosing in the study, and that the results of this study as well as the results from other toxicology studies could affect the timing and design of the development program for CTI-1601. Representatives of Goodwin reviewed the fiduciary duties of the Zafgen Board with respect to the proposed merger with Chondrial. Representatives of Goodwin provided an overview of the negotiation process to date with Chondrial’s representatives, as well as a presentation regarding the material terms of the draft merger agreement, the draft voting agreement and draft lock-up agreement. Management and representatives of MTS and Goodwin discussed with the Board the daily adjustment amounts that the parties agreed upon to address the impact that closing after March 31, 2020 would have on the respective valuations of Zafgen and Chondrial, and consequently, the exchange ratio. Management discussed Zafgen’s cash burn and cash position and the Zafgen Board ratified the liquidation plan previously approved by the Transaction Committee. The Board also discussed that to date, Chondrial had not had, and had not requested to have, discussions with Zafgen management or directors regarding their roles, compensation, retention or investment arrangements in connection with the proposed transaction, other than Dr. Barrett’s, Dr. Daniel’s and Mr. Thomas’ positions as directors of the post-closing company and Zafgen’s Chief Financial Officer’s potential consultant role with the post-closing company, which are described in the section titled “Interests of Zafgen’s Directors and Executive Officers in the Merger.” Representatives of MTS reviewed certain financial matters concerning Chondrial and the proposed merger and rendered the oral opinion of MTS Securities, LLC (a wholly-owned subsidiary of MTS), which was subsequently confirmed by the delivery of a written opinion dated December 17, 2019, to the Zafgen Board to the effect that as of the date of such opinion, and based upon and subject to the various assumptions made, procedures followed, matters considered, and qualifications and limitations set forth in its written opinion, the Exchange Ratio (as defined in the merger agreement) was fair, from a financial point of view, to the holders of Zafgen Common Stock (as more fully described in the section titled “The Merger—Opinion of Zafgen’s Financial Advisor”). After

 

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further discussing the advantages and risks of the proposed transaction that are described in the section titled “Zafgen’s Reasons for the Merger; Recommendations of the Board of Directors,” and based on the discussions and deliberations at the Zafgen Board’s meetings and Transaction Committee meetings and after receiving Zafgen management’s favorable recommendation of the merger, the Zafgen Board unanimously determined that the merger agreement and the transactions contemplated by the merger agreement were fair to, and in the best interests of, Zafgen and its stockholders, approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement, authorized management to execute the merger agreement on behalf of Zafgen, and resolved to recommend that the Zafgen stockholders vote to approve the issuance of the shares of Zafgen common stock in connection with the merger.

Later on December 17, 2019, the parties finalized and executed the merger agreement, the voting agreements and the lock-up agreements, including affiliates of Atlas Venture executing a voting agreement and lock-up agreement.

On the morning of December 18, 2019, prior to the opening of trading on the NASDAQ market, Zafgen and Chondrial issued a joint press release announcing their entry into the merger agreement and held an investor call regarding the proposed transaction.

Zafgen’s Reasons for the Merger; Recommendations of the Zafgen Board of Directors

In the course of its evaluation of the merger and the merger agreement, the Zafgen Board held numerous meetings, consulted with its management, legal counsel and its financial advisor and reviewed a significant amount of information and, in reaching its decision to approve the merger and the merger agreement, the Zafgen Board considered a number of factors, including, among others, the following factors:

 

   

information concerning Zafgen’s business, financial performance (both past and prospective) and its financial condition, results of operation (both past and prospective), business and strategic objectives, as well as the risks of accomplishing those objectives;

 

   

Zafgen’s business and financial prospects if it were to remain an independent company and the Zafgen Board’s determination that Zafgen could not continue to operate as an independent company and needed to enter into an agreement with a strategic partner;

 

   

the possible alternatives to the merger, the range of possible benefits and risks to the Zafgen stockholders of those alternatives and the timing and the likelihood of accomplishing the goal of any of such alternatives and the Zafgen Board’ assessment that the merger presented a superior opportunity to such alternatives for Zafgen stockholders;

 

   

the Zafgen Board’s view of the valuation of the potential merger candidates. In particular, the Zafgen Board’s view that Chondrial was the most attractive candidate because of its novel clinical and nonclinical protein replacement therapy programs and the Zafgen Board’s belief that the merger would create a publicly traded company focused on improving the lives of patients with rare diseases, initially Friedreich’s Ataxia, which currently has no approved therapies for treatment, and its belief that the merger with Chondrial will create more value for Zafgen’s stockholders than any of the other proposals that the Zafgen Board had received or that Zafgen could create as a standalone company;

 

   

the ability of Zafgen’s stockholders to participate in the future growth potential of the combined company following the merger;

 

   

the results of discussions with third parties relating to a variety of strategic transactions, including a licensing transaction and possible business combination or similar transaction with Zafgen;

 

   

the process undertaken by the Zafgen Board in connection with pursuing a strategic transaction and the terms and conditions of the proposed merger, in each case considering the current market dynamics;

 

   

current financial market conditions and historical market prices, volatility and trading information with respect to Zafgen common stock;

 

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the potential for obtaining a superior offer from an alternative purchaser considering the other potential strategic buyers previously identified and contacted by or on behalf of Zafgen and the risk of losing the proposed transaction with Chondrial;

 

   

the terms of the merger agreement, including the parties’ representations, warranties and covenants, the conditions to their respective obligations and the termination rights of the parties;

 

   

the financial analysis presented by MTS to the Zafgen Board on December 17, 2019 and MTS’s opinion, dated December 17, 2019, to the Zafgen Board that, as of such date , based upon and subject to the various assumptions made, procedures followed, matters considered, and qualifications and limitations set forth in such opinion, the Exchange Ratio (as defined in the merger agreement) was fair from a financial point of view, to the holders of Zafgen Common Stock (as more fully described in the section titled “The Merger—Opinion of Zafgen’s Financial Advisor”);

 

   

the likelihood that the merger would be consummated;

 

   

the merger agreement, subject to the limitations and requirements contained in the merger agreement, provides the Zafgen Board with flexibility to furnish information to and conduct negotiations with third parties in certain circumstances and, upon payment to Chondrial of a termination fee of $3,375,000 (which the Zafgen Board believes is reasonable under the circumstances) to terminate the merger agreement, to accept a superior proposal; and

 

   

the reasonableness of the potential reimbursement of certain transaction expenses of up to $350,000, which could become payable by either Zafgen or Chondrial if the merger agreement is terminated in certain circumstances.

In the course of its deliberations, the Zafgen Board also considered, among other things, the following negative factors:

 

   

the possibility that the merger will not be consummated and the potential negative effect of the public announcement of the merger on Zafgen’s business and stock price;

 

   

the challenges inherent in the combination of the two divergent businesses of the size and scope of Zafgen and Chondrial;

 

   

certain provisions of the merger agreement that could have the effect of discouraging proposals for competing proposals involving Zafgen, including the restrictions on Zafgen’ ability to solicit proposals for competing transactions involving Zafgen and that under certain circumstances Zafgen may be required to pay to Chondrial a termination fee of $3,375,000;

 

   

the strategic direction of the continuing entity following the completion of the merger, which will be determined by a board of directors initially comprised of a majority of designees of Chondrial and Deerfield;

 

   

the substantial fees and expenses associated with completing the merger, including the costs associated with any related litigation;

 

   

the risk that Chondrial is unable to meet its closing condition to deliver a net cash balance of not less than zero;

 

   

the risk that Zafgen is unable to meet its closing condition to deliver a net cash balance of at least $30,000,000; and

 

   

the risk that the merger may not be completed despite the parties’ efforts or that the closing may be unduly delayed and the effects on Zafgen as a standalone company because of such failure or delay, and that a more limited range of alternative strategic transactions may be available to Zafgen in such an event and its likely inability to raise additional capital through the public or private sale of equity securities.

 

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Although this discussion of the information and factors considered by the Zafgen Board is believed to include the material factors considered by the Zafgen Board, it is not intended to be exhaustive. In light of the variety of factors considered in connection with their evaluation of the merger and the complexity of these matters, the Zafgen Board did not find it practicable to and did not quantify or attempt to assign any relative or specific weights to the various factors that it considered in reaching its determination that the merger and the merger agreement are advisable and in best interests of Zafgen and its stockholders. In addition, the Zafgen Board did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of the Zafgen Board, but rather the Zafgen Board conducted an overall analysis of the factors described above, including discussions with and questioning of Zafgen management, Goodwin and MTS.

Recommendation of the Zafgen Board of Directors

After careful consideration, the Zafgen Board approved the merger agreement and the merger and determined that the merger agreement and the merger are advisable, and in the best interests of the stockholders of Zafgen. Therefore, the Zafgen Board recommends Zafgen stockholders vote “FOR” the issuance of the shares of Zafgen common stock in the merger and the other Zafgen proposals set forth in this proxy statement.

In considering the recommendation of the Zafgen Board with respect to the issuance of shares of Zafgen common stock in the merger, you should be aware that the directors and executive officers of Zafgen may have interests in the merger that are different from, or are in addition to, the interests of Zafgen stockholders. Please see “The Merger—Interests of Zafgen’s Executive Officers and Directors in the Merger.

THE ZAFGEN BOARD UNANIMOUSLY DETERMINED THAT THE MERGER AGREEMENT AND THE MERGER ARE ADVISABLE, FAIR AND IN THE BEST INTERESTS OF ZAFGEN’S STOCKHOLDERS AND UNANIMOUSLY APPROVED THE MERGER AGREEMENT. THE ZAFGEN BOARD UNANIMOUSLY RECOMMENDS THAT ZAFGEN’S STOCKHOLDERS APPROVE THE ISSUANCE OF ZAFGEN COMMON STOCK PURSUANT TO THE MERGER AGREEMENT AND THE REVERSE STOCK SPLIT.

Certain Zafgen Management Unaudited Prospective Financial Information

As a matter of course, Zafgen does not publicly disclose long-term projections of future financial results due to the inherent unpredictability and subjectivity of underlying assumptions and estimates. However, in connection with its evaluation of the merger, the Zafgen Board considered certain unaudited, non-public financial projections with respect to Chondrial as developed by Zafgen management, based on discussions with and materials provided by Chondrial to Zafgen management on November 11, 2019 and November 18, 2019, industry metrics and Zafgen management’s judgement, for each of the calendar years ending December 31, 2020 through 2034, (referred to as the “Zafgen management Chondrial projections”). Chondrial did not provide or review the Zafgen management Chondrial projections. The Zafgen management Chondrial projections were provided to Zafgen’s financial advisor. A summary of the Zafgen management Chondrial projections is set forth below.

The inclusion of the Zafgen management Chondrial projections should not be deemed an admission or representation by Zafgen, its financial advisor or any of their respective officers, directors, affiliates, advisors, or other representatives with respect to such projections. The Zafgen management Chondrial projections are not included to influence your views on the merger but solely to provide stockholders access to certain non-public information prepared by Zafgen management that was provided to the Zafgen Board in connection with its evaluation of the merger and to Zafgen’s financial advisor to assist with its financial analyses as described in the section titled “The Merger—Opinion of MTS Securities, LLC.” The information from the Zafgen management Chondrial projections should be evaluated, if at all, in conjunction with the historical financial statements and other information regarding Zafgen and Chondrial in this proxy statement.

 

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The unaudited prospective financial information included in this document has been prepared by, and is the responsibility of, Zafgen’s management. The unaudited prospective financial information was not prepared with a view toward public disclosure, nor was it prepared with a view toward compliance with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information, or GAAP. PricewaterhouseCoopers LLP has not audited, reviewed, examined, compiled nor applied agreed-upon procedures with respect to the accompanying unaudited prospective financial information and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP report incorporated in this proxy statement relates to Zafgen’s previously issued financial statements and the PricewaterhouseCoopers LLP report included in this proxy statement relates to Chondrial’s issued financial statements. They do not extend to the unaudited prospective financial information and should not be read to do so.

The Zafgen management Chondrial projections were prepared solely for internal use and in connection with Zafgen’s financial advisor’s work and are subjective in many respects. As a result, these Zafgen management Chondrial projections are susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. Although Zafgen believes its assumptions about Chondrial to be reasonable, all financial projections are inherently uncertain, and Zafgen expects that differences will exist between actual and projected results. Although presented with numerical specificity, the Zafgen management Chondrial projections reflect numerous variables, estimates, and assumptions made by Zafgen’s management at the time they were prepared, and also reflect general business, economic, market, and financial conditions and other matters, all of which are difficult to predict and many of which are beyond Zafgen’s control. In addition, the Zafgen management Chondrial projections cover multiple years, and this information by its nature becomes subject to greater uncertainty with each successive year. Accordingly, there can be no assurance that the estimates and assumptions made in preparing the Zafgen management Chondrial projections will prove accurate or that any of the Zafgen management Chondrial projections will be realized.

The Zafgen management Chondrial projections included certain assumptions relating to, among other things, Zafgen’s expectations, which may not prove to be accurate, based on information provided by Chondrial relating to the Friedreich’s Ataxia market; and revenues and cost of goods sold.

The Zafgen management Chondrial projections are subject to many risks and uncertainties and you are urged to review the section titled “Risk Factors” beginning on page [●] of this proxy statement for a description of risk factors relating to the merger and Chondrial’s business. You should also read the section titled “Cautionary Note Regarding Forward-Looking Statements” beginning on page [●] of this proxy statement for additional information regarding the risks inherent in forward-looking information such as the Zafgen management Chondrial projections. Zafgen management Chondrial projections that were derived or extrapolated from projections provided by Chondrial’s management were not reviewed or passed upon by Chondrial management, its board of directors or its advisors.

The inclusion of the Zafgen management Chondrial projections herein should not be regarded as an indication that Zafgen, its financial advisor or any of their respective affiliates or representatives considered or consider the Zafgen management Chondrial projections to be necessarily indicative of actual future events, and Zafgen management Chondrial projections should not be relied upon as such. The Zafgen management Chondrial projections do not take into account any circumstances or events occurring after the date they were prepared. Zafgen does not intend to, and disclaims any obligation to, update, correct, or otherwise revise the Zafgen management Chondrial projections to reflect circumstances existing or arising after the date the Zafgen management Chondrial projections were generated or to reflect the occurrence of future events, even in the event that any or all of the assumptions or other information underlying the Zafgen management Chondrial projections are shown to be in error. Furthermore, the Zafgen management Chondrial projections do not take into account the effect of any failure of the merger to be consummated and should not be viewed as accurate or continuing in that context. The statements set forth in this and the foregoing six paragraphs are referred to as “financial projection statements”.

 

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In light of the foregoing factors and the uncertainties inherent in financial projections, stockholders are cautioned not to place undue reliance, if any, on the Zafgen management Chondrial projections.

The following table, which is subject to the financial projection statements above, presents a selected summary of the unadjusted Zafgen management Chondrial projections that were made available to the Zafgen Board and Zafgen’s financial advisor.

 

    2020     2021     2022     2023     2024     2025     2026     2027     2028     2029     2030     2031     2032     2033     2034  
    (in millions)  

Net Sales

    —         —         —       $ 237     $ 672     $ 1,101     $ 1,408     $ 1,656     $ 1,675     $ 1,694     $ 1,714     $ 1,733     $ 1,753     $ 1,733     $ 1,793  

Gross Profit (1)

    —         —         (1     180       516       845       1,081       1,271       1,286       1,300       1,315       1,330       1,345       1,361       1,376  

Operating Income (2)

    (14     (26     (82     (15     139       341       547       764       773       782       791       800       809       819       828  

Net Income (3)

  ($ 14   ($ 26   ($ 82   ($ 15   $ 139     $ 254     $ 405     $ 566     $ 573     $ 579     $ 586     $ 593     $ 599     $ 606     $ 613  

 

(1)

Equal to net sales less cost of goods sold, milestones payable and royalties payable.

(2)

Equal to gross profit less research and development expenses, sales and marketing expense and general and administrative expense.

(3)

Equal to operating income less taxes.

The following table, which is subject to the financial projection statements above, presents a selected summary of the adjusted Zafgen management Chondrial projections that were made available to the Zafgen Board and Zafgen’s financial advisor. The revenues and expenses in the following projections have been adjusted for an assumption of a cumulative probability of success for CTI-1601 in the Friedreich’s Ataxia market of 25% (as to which there can be no assurance).

 

    2020     2021     2022     2023     2024     2025     2026     2027     2028     2029     2030     2031     2032     2033     2034  
    (in millions)  

Net Sales

    —         —         —       $ 60     $ 170     $ 278     $ 356     $ 418     $ 423     $ 428     $ 433     $ 438     $ 443     $ 448     $ 453  

Gross Profit (1)

    —         —         —         45       130       213       273       321       325       328       332       336       340       344       347  

Operating Income (2)

    (14     (26     (62     (30     35       86       138       193       195       197       200       202       204       207       209  

Net Income (3)

  ($ 14   ($ 26   ($ 62   ($ 30   $ 35     $ 86     $ 108     $ 143     $ 145     $ 146     $ 148     $ 150     $ 152     $ 153     $ 155  

Change in Working Capital

    —         2       3       (9     (13     (9     (9     (7     —         —         —         —         —         —         22  

Unlevered Free Cash Flow (4)

  ($ 14   ($ 24   ($ 59   ($ 39   $ 23     $ 77     $ 99     $ 136     $ 144     $ 146     $ 148     $ 149     $ 151     $ 153     $ 177  

 

(1)

Equal to net sales less cost of goods sold, milestones payable and royalties payable.

(2)

Equal to gross profit less research and development expenses, sales and marketing expense and general and administrative expense.

(3)

Equal to operating income less taxes.

(4)

Equal to operating income less taxes less change in working capital.

Opinion of Zafgen’s Financial Advisor

Zafgen retained MTS Health Partners, L.P. as a financial advisor in connection with the merger. On December 17, 2019, MTS Securities, LLC, a wholly-owned subsidiary of MTS Health Partners, L.P., rendered its oral opinion to the Zafgen Board (which was subsequently confirmed in writing as of December 17, 2019), that, as of that date and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth in such written opinion and described below, the Exchange Ratio (as defined in the merger agreement) is fair, from a financial point of view, to the holders of Zafgen common stock. References to MTS in the remainder of this section refer to MTS Securities, LLC and not MTS Health Partners, L.P.

The full text of the MTS Opinion sets forth the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken by MTS in connection with its opinion. The MTS Opinion is attached as Annex C to this proxy statement and is incorporated herein by reference. The summary of the MTS Opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of the MTS Opinion. We urge you to read carefully the MTS Opinion, together with the summary thereof in this proxy statement, in its entirety.

 

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MTS provided its opinion for the information and assistance of the Zafgen Board in connection with its consideration of the merger. The MTS Opinion addressed solely the fairness, from a financial point of view, of the Exchange Ratio (as defined in the merger agreement), to the holders of Zafgen common stock in the merger and does not address any other aspect or implication of the merger. The MTS Opinion was not a recommendation to the Zafgen Board or any stockholder of Zafgen as to how to vote or to take any other action in connection with the merger.

In the course of performing its review and analyses for rendering the opinion described above, MTS:

 

  (i)

reviewed the financial terms of a draft copy of the merger agreement dated as of December 16, 2019, which was the most recent draft available to MTS prior to the time it rendered its oral opinion (referred to as the “draft merger agreement”);

 

  (ii)

reviewed certain publicly available financial and other information concerning Zafgen and Chondrial and the industries in which they each operate;

 

  (iii)

reviewed certain internal financial analyses and forecasts prepared by and provided to MTS by the management of Zafgen relating to Zafgen’s and Chondrial’s business (referred to as the “Projections”), and utilized per the instruction of Zafgen (a summary of which is provided below in “Opinion of MTS Securities—Zafgen Valuation Analysis” and “The Merger—Certain Zafgen Management Unaudited Prospective Financial Information”;

 

  (iv)

conducted discussions with members of senior management and representatives of Zafgen and Chondrial, respectively, concerning the matters described in clauses (ii) through (iii) above;

 

  (v)

reviewed and analyzed the reported current and historical prices and trading history of shares of Zafgen common stock;

 

  (vi)

reviewed and analyzed, based on the Projections, the projected cash flows to be generated by Chondrial to determine the present value of Chondrial’s discounted cash flows;

 

  (vii)

reviewed and analyzed certain publicly available financial and other information of certain publicly traded companies that MTS deemed relevant;

 

  (viii)

reviewed and analyzed certain financial terms of completed initial public offerings for certain companies that MTS deemed relevant; and

 

  (ix)

performed such other financial studies, analyses and investigations and considered such other information as MTS deemed appropriate for the purposes of its opinion.

In arriving at its opinion, MTS assumed and relied upon, without assuming liability or responsibility for independent verification, the accuracy and completeness of all of the financial, legal, regulatory, tax, accounting and other information that was publicly available or was provided to, discussed with or reviewed by MTS and upon the assurances of the management of Zafgen and Chondrial, respectively, that they were not aware of any material relevant developments or matters related to Zafgen or Chondrial or that may affect the merger that were omitted or that remained undisclosed to MTS. The MTS Opinion does not address any legal, regulatory, tax, accounting or financial reporting matters, as to which MTS understood that Zafgen had obtained such advice as it deemed necessary from other advisors, and MTS relied with the consent of the Zafgen Board on any assessments made by such other advisors to Zafgen with respect to such matters. MTS did not conduct any independent verification of the Projections or other forward-looking information or the assumptions on which they are based. Without limiting the generality of the foregoing, with respect to the Projections, MTS assumed, with the consent of the Zafgen Board, and based upon discussions with Zafgen’s management, that the Projections were reasonably prepared in good faith and that the Projections reflected the best currently available estimates and judgments of the management of Zafgen of the future results of operations and financial performance of Zafgen and Chondrial. MTS expressed no view as to the Projections or the assumptions on which they were based and MTS assumes no responsibility for the accuracy or completeness thereof. No company or transaction used in any

 

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analysis for purposes of comparison was identical to Zafgen or Chondrial. Accordingly, an analysis of the results of the comparisons was not mathematical; rather, it involved complex considerations and judgments about differences in the companies and transactions to which Zafgen and Chondrial were compared and other factors that could affect the public trading value or transaction value of the companies. In connection with MTS’s review of the merger, and in arriving at MTS’s opinion, MTS solicited expressions of interest from other parties with respect to a business combination with Zafgen or any other alternative transactions.

In arriving at its opinion, MTS made no analysis of, and expressed no opinion as to, the adequacy of the reserves of Zafgen or Chondrial. In addition, MTS did not make any independent evaluations or appraisals of the assets or liabilities (fixed or contingent) of Zafgen or Chondrial or any of their respective subsidiaries, and was not furnished with any such evaluations or appraisals, nor did MTS evaluate the solvency of Zafgen, Chondrial or any other entity under any state or federal law relating to bankruptcy, insolvency or similar matters. MTS assumed that there was no material change in the assets, financial condition, business or prospects of Zafgen or Chondrial since the date of the most recent relevant financial information made available to MTS. Without limiting the generality of the foregoing, MTS undertook no independent analysis of any pending or threatened litigation, regulatory action, possible unasserted claims or other contingent liabilities to which Zafgen, Chondrial or any of their respective affiliates is a party or may be subject, and, at the direction of Zafgen’s management and with the Zafgen Board’s consent, MTS’s opinion made no assumption concerning, and therefore did not consider, the possible assertion of claims, outcomes or damages arising out of any such matters. MTS also assumed that neither Zafgen nor Chondrial is party to any material pending transaction that was not disclosed to MTS, including, without limitation, any financing, recapitalization, acquisition or merger, divestiture or spin-off, other than the merger, the financing in connection with the Bridge Unit Purchase Agreement (as defined in the merger agreement) and any additional Funding Commitments (as defined in the merger agreement). In addition, MTS did not conduct, nor did it assume any obligation to conduct, any physical inspection of the properties or facilities of Zafgen or Chondrial. MTS assumed, at Zafgen’s direction and with the Zafgen Board’s consent, that the only material asset of Zafgen is the Net Cash (as defined in the merger agreement), that no other assets of Zafgen, including, without limitation, any net operating losses of Zafgen, have any material value and that Zafgen does not, and does not intend to, engage in any activity that may result in the generation of any revenue.

MTS assumed that the representations and warranties of each party contained in the merger agreement and in all other related documents and instruments that are referred to therein are and will be true and correct as of the date or the dates made or deemed made, that each party thereto will fully and timely perform all of the covenants and agreements required to be performed by it under the merger agreement and any other agreement contemplated thereby and that the transactions contemplated by the merger agreement, including, without limitation, the merger, will be consummated in accordance with the terms of the merger agreement without waiver, modification or amendment of any term, condition or agreement. MTS assumed that the final form of the merger agreement will be in all material respects identical to the draft merger agreement. MTS, with the Zafgen Board’s consent, further assumed that any adjustment to the Exchange Ratio (as defined in the merger agreement) pursuant to the terms of the merger agreement will not result in any adjustment to the Exchange Ratio that is material to MTS’s analysis. MTS also assumed that any governmental, regulatory and other consents and approvals contemplated in connection with the merger will be obtained and that, in the course of obtaining any of those consents and approvals, no restrictions will be imposed or waivers made that would have an adverse effect on Zafgen, Chondrial or the contemplated benefits of the merger.

The MTS Opinion is necessarily based on economic, market, financial and other conditions as they exist, and on the information made available to MTS as of the date of such opinion. MTS did not consider any potential legislative or regulatory changes currently being considered by the United States Congress, the SEC, or any other governmental or regulatory bodies, or any changes in accounting methods or generally accepted accounting principles that may be adopted by the SEC or the Financial Accounting Standards Board. It should be understood that, although subsequent developments may affect the conclusion reached in the MTS Opinion, MTS does not have any obligation to update, revise or reaffirm such opinion. The credit, financial and stock markets as well as industries in which Zafgen and Chondrial operate have experienced, and continue to experience, volatility and

 

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MTS expressed no opinion or view as to any potential effects of such volatility on Zafgen, Chondrial or the merger. The MTS Opinion addresses solely the fairness, from a financial point of view and as of the date of such opinion, of the Exchange Ratio (as defined in the merger agreement) to the holders of Zafgen common stock and does not address any other terms in the merger agreement, or any other agreement contemplated by the merger agreement or relating to the merger or any other aspect or implication of the merger, including, without limitation, the form or structure of the merger or the fairness of the merger or the Exchange Ratio to any other securityholders or creditors or any other constituency of Zafgen. The MTS Opinion does not address Zafgen’s underlying business decision to proceed with the merger or the relative merits of the merger compared to other alternatives available to Zafgen. MTS expressed no opinion as to the prices or ranges of prices at which shares of securities of any person, including Zafgen or Chondrial, will trade at any time, including following the announcement or consummation of the merger. MTS was not requested to opine as to, and the MTS Opinion did not in any manner address, the amount or nature of compensation to any of the officers, directors or employees of any party to the merger, or any class of such persons, relative to the compensation to be paid to the holders of Zafgen common stock in connection with the merger or with respect to the fairness of any such compensation. MTS expressed no view or opinion as to any financing of the merger or the terms or conditions upon which it was obtained.

Summary of Financial Analysis

MTS performed a variety of financial analyses for purposes of rendering its opinion. The preparation of a fairness opinion is a complex process and is not susceptible to partial analysis or summary description. In arriving at its opinion, MTS considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor considered. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the value of particular techniques. The overall conclusions MTS reached were based on all the analyses and factors presented, taken as a whole, and also on application of MTS’s own experience and judgment. Such conclusions may involve significant elements of subjective judgment and qualitative analysis. MTS therefore gave no opinion as to the value or merit standing alone of any one or more parts of the analyses. Furthermore, MTS believes that the summary provided and the analyses described below must be considered as a whole and that selecting any portion of the analyses, without considering all of them, would create an incomplete view of the process underlying MTS’s analysis and opinion. As a result, the ranges of valuations resulting from any particular analysis or combination of analyses described below should not be taken to be the view of MTS with respect to the actual value of Zafgen, Zafgen common stock, Chondrial or Chondrial common stock.

Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of the corresponding summaries and are alone not a complete description of the financial analyses performed by MTS. Considering the data in the tables below without considering the corresponding full narrative descriptions of the financial analyses, including the methodologies and assumptions underlying such analyses, could create a misleading or incomplete view of the financial analyses performed by MTS.

In performing its analyses, MTS made numerous assumptions with respect to industry performance, general business, regulatory and economic conditions and other matters, all of which are beyond MTS’s control and many of which are beyond the control of Zafgen and/or Chondrial. Any estimates used by MTS in its analysis are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by such estimates.

MTS performed stand-alone valuation analyses of both Zafgen and Chondrial using a variety of valuation methodologies, as described below. MTS then performed a relative valuation analysis in order to compare the aggregate value exchange ratio implied by the Exchange Ratio (as defined in the merger agreement) to the range of aggregate value exchange ratios implied based on the respective stand-alone valuation ranges. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on

 

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market data as it existed on or before December 13, 2019 and is not necessarily indicative of current market conditions.

Zafgen Valuation Analysis

Liquidation Analysis

As noted above, at the direction of Zafgen’s management and with the Zafgen Board’s consent, MTS assumed that the only material asset of Zafgen was its cash and that Zafgen does not currently, and does not intend in the future to, conduct any activity that may result in the generation of revenue. Accordingly, MTS considered an appropriate measure of the implied equity value of Zafgen Common Stock to be the amount of cash available for distribution to Zafgen stockholders in an orderly liquidation of Zafgen. Based on information provided by Zafgen’s management, MTS calculated the total equity value of Zafgen to be $40.6 million, calculated as $73.8 million of cash as of November 30, 2019 less wind-down costs of $12.0 million less liquidation costs of $21.2 million. The analysis assumed a liquidation date of March 31, 2020, that all wind-down costs were paid in full, that all remaining licenses were terminated, that employees are retained to facilitate wind-down until liquidation date, that all employee-related costs are paid in full, and, to be conservative, that no funds were retained in reserve for unknown or contingent liabilities.

Historical Stock Price Performance

MTS also calculated the total equity value of Zafgen based on the share price trading history of Zafgen common stock for the period beginning on September 5, 2019, the day Zafgen announced plans to explore strategic options to maximize shareholder value, and ending on December 13, 2019. During this period, shares of Zafgen common stock traded as low as $0.63 per share and as high as $0.87 per share, compared to the closing price of Zafgen common stock on December 13, 2019 of $0.82 per share. Based on this range of per-share prices, MTS calculated a total equity value for Zafgen of between $24.5 million and $31.8 million. MTS also reviewed the high and low trading prices during the 12 month period ending on December 13, 2019, and noted that during this period, shares of Zafgen common stock traded as low as $0.63 per share and as high as $5.77 per share. In addition, MTS reviewed the volume weighted average trading price (referred to as “VWAP”) over the five trading day, 10 trading day, 20 trading day, 60 trading day, six month and 12 month periods ending on December 13, 2019. These VWAPs are set forth in the table below.

 

Trading Period

   VWAP  

5 Trading Day

   $ 0.83  

10 Trading Day

   $ 0.82  

20 Trading Day

   $ 0.80  

60 Trading Day

   $ 0.75  

6 Months

   $ 0.85  

12 Months

   $ 1.85  

Zafgen’s management instructed MTS to ascribe no value to Zafgen’s ongoing operations for the purposes of valuing Zafgen. Therefore, MTS noted that the liquidation analysis was relied on by MTS for valuation purposes. The share price trading history and volume weighted average trading prices were provided to the Zafgen Board for informational purposes only and were not relied upon by MTS for valuation purposes.

Chondrial Valuation Analysis

MTS analyzed the valuation of Chondrial using three different methodologies: a discounted cash flow analysis, a public trading comparable companies analysis and an analysis of initial public offerings of companies MTS deemed relevant. The results of each of these analyses are summarized below.

 

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Discounted Cash Flow Analysis

MTS estimated the present value of the cash flows to be generated by Chondrial during the period beginning on December 31, 2019 and ending on December 31, 2034 based on the Projections (risk adjusted for a cumulative probability of success of 25%). At the direction of Zafgen’s management, MTS conducted certain sensitivity analyses in connection with this discounted cash flow analysis using ranges of: (i) revenue achievement factors of 75% to 125%, as provided by Zafgen’s management; (ii) annual price increase of 0.0% to 5.0%; and (iii) cumulative regulatory probabilities of success of 20% to 30%, as provided by Zafgen’s management; as discounted back to December 31, 2019 based on a weighted average cost of capital of 13% to 15%, reflecting estimates of Chondrial’s weighted average cost of capital, based upon MTS’s analysis of the cost of capital for Chondrial’s publicly traded comparable companies (as described in more detail below under “Opinion of MTS Securities, LLC—Chondrial Valuation Analysis—Public Trading Comparable Companies Analysis”).

MTS utilized the unlevered free cash flows (defined as operating income less income tax expense, less changes in working capital (capital expenditures, and associated depreciation and amortization were deemed to be de minimis for Chondrial, and were therefore not included)), based on the Projections, that Zafgen’s management reasonably projected Chondrial will generate during the period beginning on December 31, 2019 and ending on December 31, 2034, taking into account the sensitivity metrics described above, and incorporating the cash tax savings from future NOLs that Zafgen’s management estimated will be generated by Chondrial during the projection period and that Zafgen’s management projected Chondrial will utilize during such period (to be conservative, the analysis did not include Chondrial’s estimated NOL balance at the closing of the merger and did not include a terminal value, either of which would have resulted in a higher implied equity value for Chondrial; and did not include revenues and expenses associated with development of Chondrial’s other pipeline programs or other indications of CTI-1601). The unlevered free cash flows incorporating the NOLs were then discounted to present values using a range of discount rates based on Chondrial’s estimated weighted average cost of capital.

The following table reflects the ranges of equity value of Chondrial implied by this discounted cash flow analysis for each sensitivity metric described above and using the range of discount rates based on Chondrial’s estimated weighted average cost of capital, rounded to the nearest $5 million:

 

Metric

   Metric Range    Implied Equity Value of
Chondrial (millions)

Revenue Achievement

   75% – 125%    $190 – $435

Annual Price Increase

   0% – 5%    $275 – $475

Cumulative Regulatory Probability of Success

   20% – 30%    $205 – $405

Public Trading Comparable Companies Analysis

MTS reviewed and compared the projected operating performance of Chondrial with publicly available information concerning other publicly traded comparable companies and reviewed the current market price of certain publicly traded securities of such other companies. MTS selected the following orphan/rare disease focused companies without any clinical data (excluding gene editing companies with drugs in development for orphan indications):

 

   

LogicBio Therapeutics, Inc.

 

   

Silence Therapeutics, PLC

 

   

Stoke Therapeutics, Inc.

Although none of the selected companies is directly comparable to Chondrial, MTS included these companies in its analysis because they are publicly traded companies with certain characteristics that, for

 

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purposes of analysis, may be considered similar to certain characteristics of Chondrial. For the purposes of calculating the weighted average cost of capital utilized in the discounted cash flow analysis described above, Stoke Therapeutics, Inc. was not included as a publicly traded comparable company as it had been publicly traded for less than one year as of December 13, 2019.

MTS calculated the enterprise value for the selected companies, as of December 13, 2019 by multiplying the closing price per share of common stock of such company on December 13, 2019 by the number of such company’s fully diluted outstanding shares, using the treasury stock method, and adding to that result such company’s net debt, preferred stock and minority interest, as appropriate. The table below shows the enterprise values calculated for each comparable company as of December 13, 2019:

 

Publicly Traded Comparable Company

   Enterprise Value (millions)  

LogicBio Therapeutics

   $ 137  

Silence Therapeutics

   $ 548  

Stoke Therapeutics

   $ 651  

MTS derived a maximum and minimum enterprise value range for the comparable companies, and added to those values Chondrial’s estimated net cash at closing to calculate the implied equity value range for Chondrial. For valuation purposes, Chondrial’s net cash at closing included future equity commitments by Chondrial’s shareholders through closing at no additional dilution to Zafgen and was estimated to be approximately $14 million. The table below notes the implied equity value range of Chondrial, rounded to the nearest $5 million:

 

Metric

   Metric Range
(millions)
   Implied Equity Value of
Chondrial (millions)
Enterprise Value    $137 – $651    $150 – $665

IPO Comparables Analysis

MTS also analyzed the pre-money enterprise valuations of the following orphan/rare disease focused companies (along with the corresponding initial public offering date), each of which had completed an initial public offering in 2017 or later and had not released any clinical data at the time of its initial public offering:

 

Company

   Date      Stage at IPO      Pre-Money Enterprise
Valuation (million)
 

Cabaletta Bio

     10/25/2019        Preclinical      $ 122  

Fulcrum Therapeutics

     7/18/2019        Phase I      $ 252  

Stoke Therapeutics

     6/19/2019        Preclinical      $ 403  

Kaleido Biosciences

     2/27/2019        Preclinical      $ 359  

LogicBio Therapeutics

     10/19/2018        Preclinical      $ 151  

Translate Bio

     6/27/2018        Phase I      $ 456  

Scholar Rock

     5/23/2018        Phase I      $ 228  

Solid Biosciences

     1/25/2018        Phase I/II      $ 340  

Krystal Biotech

     9/19/2017        Preclinical      $ 46  

MTS derived a low quartile and top quartile pre-money enterprise valuation range for these companies, for both the entire set of comparable companies, as well the subset of these companies which were clinical stage, and added to those values Chondrial’s estimated net cash at closing to calculate the implied equity value ranges for Chondrial. For valuation purposes, Chondrial’s net cash at closing included future equity commitments by Chondrial’s shareholders through closing at no additional dilution to Zafgen and was estimated to be approximately $14 million.

 

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The table below notes, for each metric described above, the implied equity value ranges of Chondrial, rounded to the nearest $5 million, at the low and top quartile ranges:

 

Metric

   Metric Range
(millions)
   Implied Equity Value of
Chondrial (millions)

Pre-Money Enterprise Value (All Comps)

   $151 – $359    $165 – $375

Pre-Money Enterprise Value (Clinical Only)

   $143 – $370    $160 – $385

Relative Valuation Analysis

MTS analyzed the relative valuations resulting from the stand-alone equity value ranges calculated for Zafgen and Chondrial. MTS compared the equity value of Zafgen based upon Zafgen’s liquidation analysis to the implied equity value of Chondrial based upon each of the three methodologies summarized above.

MTS compared the liquidation value of Zafgen common stock to the low and high values of Chondrial’s equity value implied by the analyses summarized above to determine the implied range of the aggregate value exchange ratio, calculated as Chondrial’s equity value divided by Zafgen’s equity value. MTS also analyzed the implied pro-forma ownership derived from these implied aggregate value exchange ratios.

The following table sets forth the results of these analyses, rounded to the nearest integer and percentage for the aggregative value exchange ratio and pro forma ownership, respectively:

 

     Implied Aggregate
Value Exchange Ratio
     Zafgen’s Implied
Pro-Forma Ownership
 

Valuation Methodology

   Low      High      Low     High  

Discounted Cash Flow

          

Sensitized by Revenue Achievement and Weighted Average Cost of Capital

     5:1        11:1        9     18

Sensitized by Annual Price Increase and Weighted Average Cost of Capital

     7:1        12:1        8     13

Sensitized by Cumulative Probability of Success and Weighted Average Cost of Capital

     5:1        10:1        9     17

Public Trading Comparable Companies Analysis

 

Enterprise Value

     4:1        16:1        6     21

IPO Comparables

 

Pre-Money Enterprise Value (All Comps)

     4:1        9:1        10     20

Pre-Money Enterprise Value (Clinical Stage Only)

     4:1        9:1        10     20

MTS compared the above ranges of implied aggregate value exchange ratios to the aggregate value exchange ratio implied by the Exchange Ratio (as defined in the merger agreement) of 1.5:1, and found that, in all instances, the range of aggregate value exchange ratios implied by the analyses described above was higher than that implied by the Exchange Ratio (as defined in the merger agreement).

MTS also compared the above ranges of Zafgen’s implied pro-forma ownership to the pro-forma ownership implied by the Exchange Ratio (as defined in the merger agreement) of 40%, and found that, in all instances, the range of Zafgen’s pro forma ownership implied by the analyses described above was lower than that implied by the Exchange Ratio (as defined in the merger agreement).

Miscellaneous

The preparation of a fairness opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the

 

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particular circumstances and, therefore, a fairness opinion is not readily susceptible to summary description. In arriving at its opinion, MTS did not draw, in isolation, conclusions from or with regard to any factor or analysis that it considered. Rather, MTS made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of the analyses.

The MTS Opinion was one of the many factors taken into consideration by the Zafgen Board in making its determination to approve the merger agreement. Consequently, the analyses as described above should not be viewed as determinative of the opinion of the Zafgen Board with respect to the merger or of whether the Zafgen Board would have been willing to agree to different terms. The Exchange Ratio was determined through arm’s-length negotiations between Zafgen and Chondrial and was approved by the Zafgen Board. MTS and its affiliates provided advice to Zafgen during these negotiations. However, neither MTS nor any of its affiliates recommended any specific amount of consideration to Zafgen or the Zafgen Board or that any specific amount of consideration constituted the only appropriate consideration for the merger.

MTS and its affiliates, as part of their investment banking services, are regularly engaged in the valuation of businesses (including those in the healthcare industry) and securities in connection with mergers and acquisitions, and for other purposes. As noted above, MTS Health Partners, L.P. acted as a financial advisor to Zafgen in connection with the merger and participated in certain of the negotiations leading to the merger agreement. Zafgen selected MTS Health Partners, L.P. as its financial advisor because it is nationally recognized in the healthcare industry as having investment banking professionals with significant experience in healthcare investment banking and merger and acquisition transactions, including transactions similar to the merger. Pursuant to an engagement letter agreement, dated as of September 3, 2019, between Zafgen and MTS Health Partners, L.P., Zafgen engaged MTS Health Partners, L.P. to act as its financial advisor in connection with Zafgen’s consideration, evaluation and/or exploration of certain potential merger and acquisition transactions or similar transactions. As permitted by the terms of the engagement letter and pursuant to MTS Health Partners, L.P.’s internal policies, MTS Securities, LLC, a wholly-owned subsidiary of MTS Health Partners, L.P., delivered the MTS Opinion. As compensation for MTS Health Partners, L.P. and its affiliates’ financial advisory services, Zafgen paid a non-refundable retainer fee of $100,000 and paid a fee of $500,000 to MTS for rendering the MTS Opinion in connection with the Zafgen Board’s consideration of the proposed transaction with Chondrial, which fee was not contingent upon the successful completion of the merger or the conclusion reached within the MTS Opinion. Upon consummation of the merger, Zafgen will be obligated to pay to MTS Health Partners, L.P. a fee equal to approximately $2,000,000 (up to $500,000 of which may be paid, at Zafgen’s discretion, in the form of Zafgen common stock), with all fees previously paid by Zafgen pursuant to the engagement letter credited towards such amount, including the fee paid by Zafgen upon delivery of the MTS Opinion. In addition, Zafgen also agreed to reimburse to MTS Health Partners, L.P. and its affiliates for their direct, reasonable and documented out-of-pocket expenses incurred in connection with any of the matters contemplated in the engagement letter. Zafgen also agreed to indemnify MTS Health Partners, L.P. and each of its related parties against various liabilities in connection with their engagement.

Separately, as the Zafgen Board was aware prior to the oral delivery of MTS’s fairness opinion, prior to MTS’s engagement by Zafgen, MTS Health Partners, L.P. was engaged by Chondrial to provide financial advisory services, including with respect to an equity financing transaction, for which MTS Health Partners, L.P. received a $50,000 up-front retainer from Chondrial. As part of the Chondrial engagement, MTS Health Partners, L.P. or its affiliates may continue to provide advisory services to Chondrial, including with respect to equity financing in connection with the consummation of the merger, and expects to receive a customary fee for such services, contingent upon the consummation of such financing. MTS Health Partners, L.P. or its affiliates did not act as a financial advisor to Chondrial with respect to the merger, and will not receive any fees from Chondrial that are contingent upon the consummation of the merger. Other than as described in this paragraph and the foregoing paragraph, neither MTS nor MTS Health Partners, L.P. has had a material relationship with, or otherwise received fees from, Zafgen or Chondrial or any other parties to the merger agreement during the two years preceding the date of the MTS Opinion. MTS, MTS Health Partners, L.P. and their affiliates may seek to

 

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provide investment banking and/or financial advisory services to Zafgen and Chondrial in the future and would expect to receive customary fees for the rendering of any such services.

Interests of Zafgen’s Directors and Executive Officers in the Merger

In considering the recommendation of the Zafgen Board that you vote in favor of the proposals outlined herein, you should be aware that aside from their interests as Zafgen stockholders, the directors and executive officers of Zafgen have interests in the merger that are different from, or in addition to, those of other Zafgen stockholders generally. Members of the Zafgen Board were aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending to Zafgen stockholders to vote in favor of the proposals outlined herein. See the section entitled “Zafgen’s Reasons for the Merger; Recommendations of the Zafgen Board of Directors” on page [●] of this proxy statement. Zafgen stockholders should take these interests into account in deciding whether to vote in favor of the proposals outlined herein. These interests are described in more detail below, and certain of them are quantified in the narrative and tables below.

Pursuant to the merger agreement, it is expected that Zafgen’s current directors, Peter Barrett, Ph.D., Thomas O. Daniel, M.D. and Frank E. Thomas, will continue to serve on the combined company’s board of directors following the merger. The merger agreement further provides that for a period of six years following the effective time of the merger:

 

   

Zafgen and the combined company shall indemnify and hold harmless each person who is or has served as a director or officer of Zafgen or Chondrial against all claims, losses, liabilities, damages, judgments, fines and reasonable fees, costs and expenses, including attorneys’ fees and disbursements, incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to the fact that such person is or was a director or officer of Zafgen or Chondrial, to the fullest extent permitted under the DGCL for directors or officers of Delaware corporations. In addition, each such director and officer, or former director and officer, is entitled to advancement of expenses incurred in the defense of any such claim, action, suit, proceeding or investigation;

 

   

the provisions of Zafgen’s ninth amended and restated certificate of incorporation and bylaws with respect to indemnification, advancement of expenses and exculpation of present and former directors and officers of Zafgen shall not be amended, modified or repealed for a period of six years from the effective time of the merger in a manner that would adversely affect the rights thereunder of individuals who, at or prior to the effective time of the merger, were officers or directors of Zafgen. The certificate of incorporation and bylaws of the combined company, shall contain provisions no less favorable with respect to indemnification, advancement of expenses and exculpation of former and present directors and officers than are presently set forth in the certificate of incorporation and bylaws of Zafgen; and

 

   

Zafgen shall maintain directors’ and officers’ liability insurance policies commencing at the closing time of the merger, on commercially available terms and conditions with coverage limits customary for U.S. public companies similar situated to Zafgen.

In addition to the indemnification obligations required by the ninth amended and restated certificate of incorporation and bylaws of Zafgen, Zafgen has entered into indemnification agreements with each of its directors and executive officers. These agreements provide for the indemnification of Zafgen’s directors and executive officers for all reasonable expenses and liabilities incurred in connection with any action or proceeding brought against them by reason of the fact that they are or were agents of Zafgen.

 

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As of December 31, 2019, Zafgen’s executive officers were as follows:

 

Name

  

Position

Jeffrey S. Hatfield

   Chief Executive Officer

Patricia L. Allen

   Chief Financial Officer