LRMR US Equity☆

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the section titled “Selected Consolidated Financial Data” and the consolidated financial statements and the related notes included elsewhere in this Annual Report. In addition to historical financial information, the following discussion contains forward-looking statements based upon our current plans, expectations and beliefs that involve risks, uncertainties and assumptions. Our actual results may differ materially from those described in or implied by these forward-looking statements as a result of many factors, including those set forth under the section titled “Risk Factors” and in other parts of this Annual Report.

Overview

We are a clinical-stage biotechnology company focused on developing treatments for patients suffering from complex rare diseases using our novel cell penetrating peptide technology platform. Our lead product candidate, CTI-1601, is a subcutaneously administered, recombinant fusion protein intended to deliver human frataxin, or FXN, an essential protein, to the mitochondria of patients with Friedreich’s ataxia. Friedreich’s ataxia is a rare, progressive and fatal disease in which patients are unable to produce sufficient FXN due to a genetic abnormality. There is currently no effective therapy for Friedreich’s ataxia. CTI-1601 is currently being evaluated in Phase 1 clinical trials in patients with Friedreich’s ataxia. In December 2020, we announced the completion of dosing of a SAD trial of CTI-1601. A Safety Review Committee reviewed preliminary blinded data after each cohort of the placebo-controlled SAD clinical trial and recommended continuation of the trial. Based on preliminary data, single subcutaneous injections of CTI-1601 at doses up to 100 mg are thought to have been well tolerated. Injection site adverse events were mild and transient, and no serious adverse events were reported. Analysis of clinical trial results remains ongoing. We expect to complete our phase 1 MAD study in the first quarter of 2021, and we expect to release top line results of both studies in the second quarter of 2021.

We have received orphan drug status, fast track designation and rare pediatric disease designation, from the FDA, for CTI‐1601. In addition, we received orphan drug designation for CTI-1601 from the European Commission. The receipt of such designations or positive opinions may not result in a faster development process, review or approval compared to products considered for approval under conventional FDA or EMA procedures and does not assure ultimate approval by the FDA or EMA.

Our CPP technology platform, which enables a therapeutic molecule to cross a cell membrane in order to reach intracellular targets, has the potential to enable the treatment of other rare and orphan diseases. We intend to use our proprietary platform to target additional orphan indications characterized by deficiencies in or alterations of intracellular content or activity.

Since our inception, we have devoted substantially all of our resources to developing CTI-1601, building our intellectual property portfolio, developing third-party manufacturing capabilities, business planning, raising capital, and providing general and administrative support for such operations.

We have never generated any revenue and have, to date, incurred net losses. We incurred net losses of approximately $42.5 million and $23.1 million for the year ended December 31, 2020, and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $65.6 million and a cash, cash equivalents and marketable debt securities balance of $92.6 million. These losses have resulted principally from costs incurred in connection with research and development activities, and general and administrative costs associated with our operations. We expect to incur significant expenses and operating losses for the foreseeable future.

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

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• Seek to obtain regulatory approval for our product candidates;

• Identify, acquire or in-license other product candidates and technologies;

• Maintain, leverage and expand our intellectual property portfolio; and

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

We believe that, based on our current operating plan, our cash and cash equivalents as of the date of this Annual Report will enable us to fund operations for at least twelve months from the issuance of our annual financial statements.

COVID-19 Update

In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of Coronavirus, a global pandemic. This outbreak is causing major disruptions to businesses and markets worldwide as the virus spreads and mutates.

In December 2020, the FDA granted emergency use authorization for two COVID-19 vaccines. Additional Emergency Use Authorizations, or EUAs, are expected to be granted to other pharmaceutical/biotechnology companies. The distribution and administration of the two approved vaccines have been slow.

In January 2021, several mutations of the original COVID-19 virus were discovered. These variants are believed to be more contagious and perhaps more deadly than the original COVID-19 virus.

The extent of the effect of COVID-19 on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, including the spread of more contagious and deadly variants, the successful distribution and use of current and future COVID-19 vaccines, and governmental, regulatory and other private sector responses, all of which are uncertain and difficult to predict. Although we are unable to estimate the financial effect of the pandemic at this time, if the pandemic remains uncontained or if the current vaccines prove ineffective against future viral mutations, it could have a material adverse effect on our business, results of operations, financial condition and cash flows. The financial statements do not reflect any adjustments as a result of the pandemic.

The pandemic resulted in the temporary stoppage of our CTI-1601 Phase 1 clinical trials in patients with Friedreich’s ataxia. In July 2020, we resumed these clinical trials. We completed dosing of the SAD clinical trial in December 2020 and we expect to complete the dosing of the third cohort of the MAD clinical trial in the first quarter of 2021.

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We conduct these clinical trials at one clinical trial site. Because Friedreich’s ataxia is a rare disease, there are a limited number of patients in close proximity to the clinical trial site and clinical trial patients travel from locations throughout the United States to the clinical trial site to participate. After dosing, patients remain in isolation in the clinical research unit for a period of time. The travel advisories and risk of infection related to COVID-19 have presented increased risks to patients traveling to our clinical trial site for dosing and we expect to incur additional clinical trial costs to safely transport and isolate patients participating in the trial. In addition, additional stoppages or delays in the trial could result from new developments with respect to COVID-19. While top line results from the ongoing Phase 1 clinical trials were originally expected by the end of 2020, the delay in the clinical trial timeline caused by the ongoing impact of COVID-19 resulted in top line results now being expected in the second quarter of 2021. We may experience additional delays in clinical trial timelines as a result of additional travel and hospital restrictions related to the COVID-19 pandemic which may be imposed, including as a result of resurgences of COVID-19 cases in certain geographic areas.

Merger with Zafgen, Inc.

On December 17, 2019, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Zordich Merger Sub, Inc., or Merger Sub, our wholly owned subsidiary, Chondrial, and Chondrial Holdings LLC or Holdings, (the sole investor in Chondrial) pursuant to which the Merger Sub would merge with and into Chondrial, with Chondrial surviving the merger as our wholly owned subsidiary, or the Merger. The Merger was completed on May 28, 2020 pursuant to the terms of the Merger Agreement.

Pursuant to the terms of the Merger Agreement, upon closing of the Merger, all of Chondrial’s outstanding common stock was exchanged for our common stock and all outstanding options exercisable for units of Holdings were exchanged for options to purchase our common stock. In addition, immediately prior to the closing of the Merger, we effected a 1 for 12 reverse stock split and changed our name from Zafgen, Inc. to Larimar Therapeutics, Inc. Following the Merger, the business conducted by Chondrial became our primary business.

The business combination was accounted for as a reverse acquisition in accordance with GAAP. Under this method of accounting, Chondrial was deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the facts that, immediately following the merger: (i) Chondrial’s stockholders owned a substantial majority of the voting rights in the combined company, (ii) the majority of the board of directors of the combined company was composed of directors designated by Chondrial under the terms of the Merger Agreement and (iii) existing members of Chondrial management comprised the management of the combined company. Accordingly, for accounting purposes, the business combination was treated as the equivalent of Chondrial issuing stock to acquire Zafgen’s net assets. As a result, as of the closing date of the Merger, Zafgen’s net assets were recorded at their acquisition-date fair values, which were then adjusted for the difference between the purchase price and the fair value of the assets acquired, in the financial statements of Chondrial and the reported operating results prior to the business combination are those of Chondrial. As the Merger has been accounted for as an asset acquisition, goodwill has not been recorded within the consolidated balance sheet.

Private Placement

On May 28, 2020, we entered into a Securities Purchase Agreement with certain accredited investors for the sale by us in a private placement of 6,105,359 shares of our common stock, and pre-funded warrants to purchase an aggregate of 628,403 shares of our common stock, or the Pre-funded Warrants. The Pre-Funded Warrants are immediately exercisable at an exercise price for $0.01 and are exercisable indefinitely. We refer to this sale herein as the Private Placement.

The Private Placement closed on June 1, 2020. The aggregate gross proceeds for the issuance and sale of the Private Placement Shares and Pre-Funded common stock Warrants were $80.0 million and, after deducting certain of our expenses, the net proceeds we received in the Private Placement were $75.4 million. We intend to use the net proceeds from the Private Placement for research and development of our product candidates, working capital and general corporate purposes.

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Financial Operations Overview

Revenue

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

Operating Expenses

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

Research and Development Expenses

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

• external costs of outside consultants and vendors;

• payments made under our third-party licensing agreements;

• sponsored research agreements;

• laboratory consumables; and

• allocated facility-related costs.

Research and development costs are central to our business and are expensed as incurred. Costs for certain activities, such as manufacturing, nonclinical studies and clinical trials are generally recognized based on the evaluation of the progress of completion of specific tasks using information and data provided by our vendors and collaborators. We expect to increase our investment in research and development in order to advance CTI-1601 through additional clinical trials. As a result, we expect that our research and development expenses will increase throughout the foreseeable future as we pursue clinical development of CTI-1601 or any other product candidates we develop.

At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of CTI-1601 or any other product candidates we develop. We are also unable to predict when, if ever, material net cash inflows will commence from sales of our product candidates. The duration, costs, and timing of clinical trials and development of CTI-1601 or any other product candidates we develop will depend on a variety of factors, including:

• clinical trial results;

• uncertainties in clinical trial enrollment rate or design;

• significant and changing government regulation;

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• the timing and receipt of any regulatory approvals;

• our ability to retain key research and development personnel.

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

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs, consisting of salaries, related benefits and stock-based compensation, of our executive, finance, information technology, and other administrative functions. General and administrative expenses also include the costs of functioning as a public company, specifically audit, directors and officers insurance and other professional and legal expenses, including corporate and intellectual property activities. General and Administrative expenses also include other insurance expenses, and professional fees for, tax and legal services, including legal expenses to pursue patent protection of our intellectual property. We expect that our general and administrative expenses will increase in the foreseeable future as we hire additional employees to implement and improve our operational, financial and management systems.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, costs and expenses, and related disclosures. We believe that the estimates and assumptions involved in the accounting policies described below may have the greatest potential impact on our consolidated financial statements and, therefore, consider these to be our critical accounting policies. We evaluate these estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.

Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses and evaluate payments made to vendors in advance of actual work activities being performed. This process involves reviewing open contracts and purchase orders, communicating with our personnel and outside vendors to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to:

• CROs, in connection with clinical trials;

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• vendors in connection with nonclinical development activities;

We base our expenses related to clinical trials and manufacturing costs on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs or CMOs that conduct and manage clinical trials or manufacture clinical trial material on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense, nonclinical expense or manufacturing activities. Payments under some of these contracts depend on factors such as the completion of milestones. In accruing CRO service fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and the level of effort to be expended in each period. In accruing CMO costs, we estimate the time period that manufacturing will be completed, the achievement of milestones and the percentage completion of each specific CMO agreement. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us recognizing adjustments in future periods as additional information becomes available.

Stock-Based Compensation

We measure all stock-based awards granted to employees, non-employee consultants and directors based on the fair value on the date of grant using the Black-Scholes option-pricing model. Compensation expense of those awards is recognized over the requisite service period, which is generally the vesting period of the respective award. Typically, we issue awards with only service-based vesting conditions and record the expense for these awards using the straight-line method. We account for forfeitures as they occur.

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

Prior to May 28, 2020, we had been a private company and lacked company-specific historical and implied volatility information for our common stock. Therefore, we estimate our expected common stock price volatility based on the historical volatility of publicly traded peer companies and expect to continue to do so until we have adequate historical data regarding the volatility of our own traded stock price. The expected term of our stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield considers the fact that we have never paid cash dividends on common stock and do not expect to pay any cash dividends in the foreseeable future.

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Results of Operations

Comparison of the years ended December 31, 2020 and 2019

The following table summarizes our results of operations for the years ended December 31, 2020 and 2019:

Year Ended December 31,

Increase

(in thousands)

Statement of Operations Data:

Operating expenses:

Research and development expenses

Research and development expenses for the year ended December 31, 2020 increased $10.6 million compared to the year ended December 31, 2019. The increase in research and development expenses as compared to the prior year period was primarily driven by higher clinical supply manufacturing costs of $3.3 million, an increase in clinical trial costs of $4.8 million, an increase in personnel related costs of $1.7 million due to headcount additions in our research and development functions and an increase in stock compensation expense of $0.7 million associated with stock option grants made in 2020. The remaining increase is primarily related to internal laboratory costs, increased facility costs partially offset by a decrease in toxicology studies costs.

General and administrative expenses

General and administrative expenses for the year ended December 31, 2020 increased $9.0 million compared to the year ended December 31, 2019. The increase in general and administrative expenses as compared to the prior year period was primarily driven by an increase in professional fees and insurance costs of $6.3 million that are mainly due to the costs of operating as a public company, an increase in personnel related costs of $0.7 million due to increased headcount, and an increase in stock-based compensation of $1.3 million associated with stock option grants made in 2020. The remaining increase is primarily related to additional facility costs related to leases entered in 2020.

Liquidity and Capital Resources

Since our inception, we have not generated any revenue from any sources, including from product sales, and have incurred significant operating losses and negative cash flows from our operations. We have devoted substantially all of our resources to developing CTI-1601, building our intellectual property portfolio, developing third-party manufacturing capabilities, business planning, capital raising, and providing general and administrative support for such operations.

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Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented below:

Year Ended December 31,

(in thousands)

Net cash used in operating activities $ (42,199 ) $ (22,699 )

Net cash provided by (used in) investing activities 17,090 (83 )

Net cash provided by financing activities 93,587 19,395

Net increase in cash, cash equivalents and restricted cash $ 68,478 $ (3,387 )

Net cash used in operating activities

During the year ended December 31, 2020, operating activities used $42.2 million of cash, resulting from our net loss of $42.5 million, adjusted for noncash expenses of $2.3 million, and changes in our operating assets and liabilities of $2.0 million. Our net loss was primarily attributed to operating expenses of $42.8 million. The change in operating assets and liabilities was primarily due to an increase in accrued expense and prepaid expenses due to the growth in our operating activities and partially offset by a decrease in accounts payable due to the timing of invoice processing.

During the year ended December 31, 2019, operating activities used $22.7 million of cash, resulting from our net loss of $23.1 million, adjusted for noncash expenses of $0.2 million and changes in our operating assets and liabilities of $0.2 million. Our net loss was primarily attributed to operating expenses of $23.2 million.

Net cash provided by (used in) investing activities

During the year ended December 31, 2020, investing activities provided $17.1 million of net cash, resulting from $41.9 million of cash acquired from our merger with Zafgen and $1.0 million representing maturities and sales of marketable securities, which was offset by transaction costs associated with the Merger of $1.3 million, the purchase of $24.5 million in marketable securities and $0.1 million used for the purchase of equipment.

During the year ended December 31, 2019, investing activities used $0.1 million of cash for the purchase of property and equipment.

Net cash provided by financing activities

During the year ended December 31, 2020, financing activities provided $93.6 million of cash that was the result of proceeds from the sale of common stock of $75.6 million and capital contributions from related parties prior to the merger with Zafgen of $18 million. During the year ended December 31, 2019, net cash provided by financing activities of $19.4 million was the result of capital contributions from related parties of $19.4 million.

Operating Capital Requirements

CTI-1601 is currently in Phase 1 clinical development, therefore we expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that we will continue to incur expenses, if and as we seek to:

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• Seek to obtain regulatory approvals for our product candidates;

• Identify, acquire or in-license other product candidates and technologies;

• Maintain, leverage and expand our intellectual property portfolio; and

We expect to continue to generate operating losses for the foreseeable future. We completed the Merger on May 28, 2020 which, upon closing, provided cash, cash equivalents, restricted cash and marketable debt securities of $42.9 million concurrent with the Private Placement which provided additional net proceeds of $75.4 million. In August 2020, the Company entered into an Equity Distribution Agreement, or the ATM Agreement, with an investment bank., in connection with the establishment of an “at-the-market” offering program under which the Company may sell up to an aggregate of $50,000,000 of shares of its common stock from time to time through this investment bank., as sales agent. As of December 31, 2020, 11,524 shares of common stock have been sold under the Agreement for net proceeds of $0.2 million at an average gross price per share of $21.89.

We believe that, based on our current operating plan, our cash, cash equivalents and marketable debt securities as of the filing date, we will be able to fund operations for at least twelve months.

Until such time, if ever, as we can generate substantial revenue, we expect to seek additional funding through a combination of equity offerings, debt financings, other third-party funding, marketing and distribution arrangements, and other collaborations, strategic alliances and licensing arrangements. We may not be able to obtain financing on acceptable terms, or at all, and we may not be able to enter into collaborations or other arrangements. The terms of any financing may adversely affect the holdings or our existing stockholders’ rights. If we are unable to obtain additional funding, we will be forced to delay, reduce or eliminate some or all of our research and development programs, product portfolio expansion or commercialization efforts, which would adversely affect our business, or we may be unable to continue operations.

Off-Balance Sheet Arrangements

During the periods presented we did not have, and we currently do not have, any off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our balance sheets.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2020 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:

Payments due by Period

Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years

(in thousands)

Recently Issued Accounting Pronouncements

Please read Note 2 to our consolidated financial statements included in Part , Item,” of this Annual Report for a description of recent accounting pronouncements applicable to our business.

Other Company Information

None.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements and the report of our independent registered public accounting firm are included in this Annual Report on Form 10-K on the pages indicated in Part IV, Item 15.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on their evaluation of our disclosure controls and procedures as of December 31, 2020, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Remediation of Previously Reported Material Weaknesses

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls. As previously reported on Form 8-K/A filed with the SEC on June 26, 2020 and in our subsequent Form 10-Q reports for the periods ending June 30 and September 30, 2020, management identified material weaknesses in internal control over financial reporting during the audit of our consolidated financial statements for the years ending December 31, 2019 and December 31, 2018. The material weaknesses that were previously identified related to the following:

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Management has been actively engaged in remediating the above-described material weaknesses. During the year ended December 31, 2020, we implemented measures designed to improve our internal control over financial reporting to remediate these material weaknesses, including:

Management has concluded that the actions taken to strengthen our internal control over financial reporting, aswell as the results of our testing over the design and operating effectiveness of these controls remediated the previously identified material weaknesses as of December 31, 2020. However, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with applicable policies, processes and documentation requirements may deteriorate.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under that framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2020.

Changes in Internal Control Over Financial Reporting

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

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

ITEM 11.EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

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

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

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

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PART IV

ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) 1. Financial Statements

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

2. Financial Statement Schedules

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

3. Exhibits

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

The following exhibits are being filed herewith:

EXHIBIT INDEX

* Filed Herewith

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

Exhibit No. Exhibit

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21.1* Subsidiaries of Larimar Therapeutics, Inc.

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

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

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

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101.DEF XBRL Taxonomy Extension Definition Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

ITEM 16. Form 10-K Summary

None.

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SIGNATURES

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

LARIMAR THERAPEUTICS, INC.

By: /s/ Carole Ben-Maimon

Name: Carole Ben-Maimon

Title: President and Chief Executive Officer

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

Signature Title Date

Carole Ben-Maimon

Michael Celano

/s/ Joseph Truitt Chairman, Board of Directors March 4, 2021

Joseph Truitt

/s/ Peter Barrett Director March 4, 2021

Peter Barrett

/s/ Frank E. Thomas Director March 4, 2021

Frank E. Thomas

/s/ Jonathan Leff Director March 4, 2021

Jonathan Leff

/s/ Thomas E. Hamilton Director March 4, 2021

Thomas E. Hamilton

/s/ Thomas O. Daniel Director March 4, 2021

Thomas O. Daniel

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INDEX

Page

Report of Independent Registered Public Accounting Firm F-1

Consolidated Balance Sheets as of December 31, 2020 and 2019 F-3

Notes to Consolidated Financial Statements F-7

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Report of Independent Registered Public Accounting Firm

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

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Larimar Therapeutics, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive loss, of changes in stockholders’ equity (deficit) and of cash flows for the years then ended including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to theconsolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Accrued Research and Development Expenses

As described in Notes 2 and 7 to the consolidated financial statements, the Company recognizes external research and development costs based on an evaluation of the progress to completion of specific tasks using information provided to the Company by its service providers. Within accrued expenses, total accrued research and development expenses amounted to $3.4 million as of December 31, 2020. As disclosed, management’s process involves reviewing open contracts and purchase orders, communicating with personnel and outside vendors to identify

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

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

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, testing management’s process for developing the estimates of accrued research and development expenses, which included (i) evaluating the reasonableness of management’s estimates of the level of service performed and the associated costs incurred for the services when invoices or other notification of actual costs have not yet been received; and (ii) testing the completeness and accuracy of data used by management in accrued research and development expenses calculations by comparing amounts, on a test basis, to contracts and invoices. Evaluating the reasonableness of management’s estimate of the level of service performed and the associated costs incurred involved assessing management’s ability to reasonably estimate the level of service and associated costs by comparing such estimates to invoices received, provisions in the contracts and other evidence including communications the company received from third-party vendors.

/s/ PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

March 4, 2021

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

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PART I-FINANCIAL INFORMATION

Item 1. Financial Statements

LARIMAR THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

December 31, December 31,

Assets

Current assets:

Marketable debt securities 24,490 —

Prepaid expenses and other current assets 5,314 3,741

Property and equipment, net 1,040 274

Operating lease right-of-use assets 3,936 87

Restricted cash 1,339 —

Liabilities and Stockholders’ Equity (Deficit)

Current liabilities:

Operating lease liabilities, current 515 97

Operating lease liabilities 6,002 —

Commitments and contingencies (See Note 9)

Stockholders’ equity:

Accumulated other comprehensive gain 1 —

Total stockholders’ equity (deficit) 89,692 (694 )

Total liabilities and stockholders’ equity (deficit) $ 104,686 $ 5,201

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

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LARIMAR THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

Year Ended December 31,

Operating expenses:

Net loss per share, basic and diluted $ (3.57 ) $ (3.80 )

Comprehensive loss:

Other comprehensive loss:

Unrealized gain on marketable debt securities 1 —

Total other comprehensive gain 1 —

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

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LARIMAR THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share data)

Accumulated

Additional Other Total

Common Stock Paid-in Accumulated Comprehensive Stockholders’

Shares Par Value Capital Deficit Loss Equity (Deficit)

Capital contributions from related party — — 19,395 — — 19,395

Stock-based compensation expense — — 129 — — 129

Accumulated

Additional Other Total

Common Stock Paid-in Accumulated Comprehensive Stockholders’

Shares Par Value Capital Deficit Loss Equity (Deficit)

Capital contributions from related party — — 17,995 — — 17,995

Stock-based compensation expense — — 2,161 — — 2,161

Unrealized gain on marketable debt securities — — — — 1 1

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

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LARIMAR THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Year Ended December 31,

Cash flows from operating activities:

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

Stock-based compensation expense 2,161 129

Depreciation expense 155 78

Amortization of premium on marketable securities 10 —

Changes in operating assets and liabilities:

Prepaid expenses and other current assets (1,647 ) (3,285 )

Right-of-use assets 405 —

Operating lease liabilities (427 ) —

Net cash used in operating activities: (42,199 ) (22,699 )

Cash flows from investing activities:

Purchase of property and equipment (62 ) (83 )

Purchase of marketable securities (24,486 ) —

Maturities and sales of marketable securities 1,000 —

Merger transaction costs (1,296 ) —

Net cash provided by (used in) investing activities 17,090 (83 )

Cash flows from financing activities:

Capital contribution from related party 17,995 19,395

Net cash provided by financing activities 93,587 19,395

Net increase in cash, cash equivalents and restricted cash 68,478 (3,387 )

Cash, cash equivalents and restricted cash at beginning of period 1,009 4,396

Cash, cash equivalents and restricted cash at end of period $ 69,487 $ 1,009

Supplemental disclosure of non-cash investing and financing activities:

Leased assets obtained in exchange for new operating lease liabilities $ 448 $ —

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

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LARIMAR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Larimar Therapeutics, Inc., together with its subsidiaries (the “Company” or “Larimar”), is a clinical-stage biotechnology company focused on developing treatments for patients suffering from complex rare diseases using our novel cell penetrating peptide technology platform. Our lead product candidate, CTI-1601, is a subcutaneously administered, recombinant fusion protein intended to deliver human frataxin, or FXN, an essential protein, to the mitochondria of patients with Friedreich’s ataxia. Friedreich’s ataxia is a rare, progressive and fatal disease in which patients are unable to produce sufficient FXN due to a genetic abnormality.

The Company is subject to risks and uncertainties common to pre-commercialization companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with governmental regulations, failure to secure regulatory approval for CTI-1601 or any other product candidates and the ability to secure additional capital to fund operations. Drug candidates currently under development will require extensive nonclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel, and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s drug development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of Coronavirus, a global pandemic. This outbreak is causing major disruptions to businesses and markets worldwide as the virus spreads. The extent of the effect on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, the impact of known and future variants of the COVID-19 virus, the effectiveness and availability of vaccines against all variants and mutations of the COVID-19 virus, the willingness of individuals to avail themselves of the vaccines, and governmental, regulatory and private sector responses, all of which are uncertain and difficult to predict. Although the Company is unable to estimate the financial effect of the pandemic at this time, if the pandemic remains uncontained or worsens, it could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows. The financial statements do not reflect any adjustments as a result of the pandemic.

The pandemic resulted in the temporary stoppage of the Company’s Phase 1 clinical trials studying CTI-1601 in patients with Friedreich’s ataxia after the completion of two cohorts. In July 2020, the Company resumed its Phase 1 clinical trials of CTI-1601. The Company is conducting these clinical trials at one clinical trial site in New Jersey. Because Friedreich’s ataxia is a rare disease, there are a limited number of patients in close proximity to the clinical trial site and clinical trial patients travel from throughout the United States to the clinical trial site to participate. After dosing, patients remain in isolation in the clinical research unit for a period of time. The travel advisories and risk of infection related to COVID-19 have presented increased risks to patients traveling to the Company’s clinical trial site for dosing and the Company expects to incur additional clinical trial costs to safely transport and isolate patients participating in the trial. Top line data from these clinical trials are currently expected in the second quarter of 2021. The Company may experience delays in clinical trial timelines as a result of additional travel and hospital restrictions related to the COVID-19 pandemic which may be imposed, including as a result of resurgences of COVID-19 cases in certain geographic areas, the impact of the known and future virus variants, and the efficacy of vaccines against all variants and mutation of the COVID-19 virus.

Merger with Zafgen

On December 17, 2019, Zafgen, Inc. (“Zafgen”), Chondrial Therapeutics Inc. (“Chondrial”), Zordich Merger Sub, Inc. (“Merger Sub”) and Chondrial Holdings, LLC (“Holdings”), the sole stockholder of Chondrial, entered into an Agreement and Plan of Merger, as amended on March 9, 2020 (the “Merger Agreement”), pursuant to which Merger Sub merged with and into Chondrial, with Chondrial surviving as a wholly owned subsidiary of the Company and the surviving corporation of the merger (the “Merger”).

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The transaction was accounted for as a reverse acquisition in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Under this method of accounting, Chondrial was deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the facts that, immediately following the Merger: (1) former shareholders of Chondrial own a substantial majority of the voting rights of the post-mergercompany; (2) the majority of the board of directors of the combined company is composed of directors designated by Chondrial under the terms of the merger agreement; and (3) existing members of Chondrial management constitute the management of the combined company.Because Chondrial has been determined to be the accounting acquirer in the Merger, but not the legal acquirer, the Merger is deemed a reverse acquisition under the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. As a result, the historical financial statements of Chondrial are the historical financial statements of the combined company.As the Merger has been accounted for as an asset acquisition, goodwill has not been recorded within the consolidatedbalance sheet.

The Merger was completed on May 28, 2020 pursuant to the terms of the Merger Agreement. In addition, immediately prior to the closing of the Merger, Zafgen effected a 1-for-12 reverse stock split (the “Reverse Stock Split”) of Zafgen’s common stock, par value $0.001 per share (the “Zafgen Common Stock”). At the effective time of the Merger (the “Effective Time”), each share of Chondrial’s common stock, par value $0.001 per share (“Chondrial Common Stock”), outstanding immediately prior to the Effective Time was converted into the right to receive shares of Zafgen Common Stock based on an exchange ratio set forth in the Merger Agreement. At the Effective Time following the Reverse Stock Split, the exchange ratio was determined to be 60,912.5005 shares of Zafgen Common Stock for each share of Chondrial Common Stock (the “Exchange Ratio”). At the closing of the Merger on May 28, 2020, Zafgen issued an aggregate of 6,091,250 shares of its common stock to Holdings (the “Merger Shares”), based on the Exchange Ratio after giving effect to the Reverse Stock Split described below. Holdings subsequently distributed the Merger Shares to its members.

In addition, all outstanding options exercisable for common units of Holdings became options exercisable for the shares of common stock of Zafgen based on the conversion factor discussed within the Merger Agreement. In connection with the Merger, Zafgen changed its name to Larimar Therapeutics, Inc. Following the closing of the Merger, Chondrial Therapeutics, Inc. became a wholly owned subsidiary of the Company. In December, Chondrial Therapeutics was legally merged into Larimar Therapeutics, Inc. As used herein, the words “the Company” refers to, for periods following the Merger, Larimar, together with its subsidiaries, and for periods prior to the Merger, Chondrial Therapeutics Inc., and its direct and indirect subsidiaries, as applicable.

Basis of Presentation

The consolidated financial statements include the accounts of Larimar and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. The accompanying consolidated financial statements have been prepared in conformity with GAAP. Unless otherwise noted, all references to common stock share and per share amounts have also been adjusted to reflect the Exchange Ratio.

Reverse Stock Split

On May 28, 2020, immediately prior to the closing of the Merger, Zafgen effected the Reverse Stock Split. Accordingly, all share and per share amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the Reverse Stock Split. No fractional shares were issued in connection with the Reverse Stock Split. Unless otherwise noted, all references to common stock share and per share amounts have also been adjusted to reflect the Exchange Ratio.

Going Concern Assessment

In accordance with Accounting Standards Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, the Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. As of the issuance date of these consolidated financial statements, the Company expects that its cash, cash equivalents and marketable securities will be sufficient to fund its forecasted operating expenses and capital expenditure requirements for at least the next twelve months from the issuance date of these financial statements.

F-8

Since its inception, the Company has incurred significant operating losses and negative cash flows from operations. The Company has incurred recurring losses since inception, including net losses of $42.5 million and $23.1 million for the years ended December 31, 2020, and 2019, respectively. In addition, as of December 31, 2020, the Company had an accumulated deficit of $65.6 million. The Company expects to continue to generate operating losses for the foreseeable future. As of December 31, 2020, we have approximately $92.6 million of cash, cash equivalents and marketable securities available for use to fund ouroperations.

The Company expects that its research and development and general and administrative expenses will continue to increase. The Company has not yet commercialized any products and does not expect to generate revenue from the commercial sale of any products for several years, if at all. Until such time, if ever, we expect to seek additional funding through a combination of equity offerings, debt financings, other third-party funding, marketing and distribution arrangements, and other collaborations, strategic alliances and licensing arrangements. We may not be able to obtain financing on acceptable terms, or at all, and we may not be able to enter into collaborations or other arrangements.

If the Company is unable to obtain future funding when needed, the Company may be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or pre‐commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations. There is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all. Additionally, the terms of any financing may adversely affect the holdings or our existing stockholders’ rights. In the event the Company is not successful in obtaining sufficient funding, the Company has discretion in delaying certain research and development programs and personnel expenses, which would provide further flexibility in managing liquidity.

The Company has funded its operations to date primarily with proceeds from sales of common stock, prefunded warrants for the purchase of common stock and contributions from Holdings. In 2020, the Company completed the Merger and acquired $42.9 million of cash, cash equivalents, restricted cash and marketable debt securities that were held by Zafgen immediately prior to the Merger. The Company also raised $75.4 million, net of offering costs, through a private offering of common stock and prefunded warrants to purchase shares of common stock in connection with and immediately after the closing of the Merger. In addition, in 2020, prior to the Merger, the Company received $18.0 million in capital contributions from Holdings.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the accrual of research and development expense, valuation of stock-based awards and valuation of leases. Due to inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in these estimates. On an ongoing basis, the Company evaluates its estimates and assumptions.

Concentrations of Credit Risk and Significant Suppliers

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company generally maintains cash balances in various operating accounts at financial institutions that management believes to be of high credit quality in amounts that may exceed federally insured limits. The Company has not experienced losses related to its cash and cash equivalents.

The Company is highly dependent on third-party manufacturers to supply products for research and development activities in its programs. The Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for the active pharmaceutical ingredients and formulated drugs related to these programs. These programs could be adversely affected by a significant interruption in these manufacturing services or in the supply of active pharmaceutical ingredients and formulated drugs.

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Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents consisted of commercial paper, corporate bonds with maturity dates of less than three months at the date of acquisition and money market funds as of December 31, 2020. As of December 31, 2019, the Company did not have cash equivalents.

Marketable debt securities

Marketable debt securities consist of debt investments with original maturities greater than ninety days. The Company classifies its marketable debt securities as available-for-sale. Accordingly, these investments are recorded at fair value, which is based on quoted market prices. When the fair value is below the amortized cost the amount of the expected credit loss is estimated. The credit-related impairment amount is recognized in net income; the remaining impairment amount and unrealized gains are reported as a component of accumulated other comprehensive income in stockholders’ equity. Credit losses are recognized through the use of an allowance for credit losses account and subsequent improvements in expected credit losses are recognized as a reversal of the allowance account. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, the allowance for credit loss is written off and the excess of the amortized cost basis of the asset over its fair value is recorded in net income.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is recognized using the straight-line method over a five orseven-year estimated useful life for equipment, furniture and fixtures and office equipment. Leasehold improvements are amortized over the shorter of the asset life or the term of the lease agreement. Expenditures for repairs and maintenance of assets are charged to expense as incurred. Upon retirement or sale, the cost and related accumulated depreciation of assets disposed of are removed from the accounts and any resulting gain or loss is included in loss from operations.

Impairment of Long-Lived Assets

Long-lived assets consist of property and equipment, net ̧ and the net operating lease asset. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

Segment Information

The Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions. The Company’s focus is on the research, development and commercialization of novel therapeutics for the treatment of rare diseases.

Research and Development Costs

Costs associated with internal research and development and external research and development services, including drug development and nonclinical studies, are expensed as incurred. Research and development expenses include costs for salaries, employee benefits, subcontractors, facility-related expenses, depreciation, stock-based compensation, third-party license fees, laboratory supplies, and external costs of outside vendors engaged to conduct discovery, nonclinical and clinical development activities and clinical trials as well as to manufacture clinical trial materials, and other costs. The Company recognizes external research and development costs based on an evaluation of the progress to completion of specific tasks using information provided to the Company by its service providers.

F-10

Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such prepaid expenses are recognized as an expense when the goods have been delivered or the related services have been performed, or when it is no longer expected that the goods will be delivered, or the services rendered.

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

Patent Costs

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

Stock-Based Compensation

The Company measures all stock-based awards granted to employees, non-employee consultants and directors based on the fair value on the date of grant using the Black-Scholes option-pricing model. Compensation expense of those awards is recognized over the requisite service period, which is the vesting period of the respective award. Typically, the Company issues awards with only service-based and market-based vesting conditions and records the expense for these awards using the straight-line method. The Company accounts for forfeitures as they occur.

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

Prior to May 28, 2020, the Company had been a private company and lacked company-specific historical and implied volatility information for its common stock. Therefore, the Company estimated its expected common stock price volatility based on the historical volatility of publicly traded peer companies and expects to continue to do so until it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield considers the fact that the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future.

Income Taxes

The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.

The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.

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Comprehensive Loss

Comprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders. For the years ended December 31, 2020 and 2019, the Company’s only element of other comprehensive income was unrealized gain on marketable securities.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Basic shares outstanding includes the weighted average effect of the Company’s prefunded warrants issued in June 2020, the exercise of which requires little or no consideration for the delivery of shares of common stock. Basic and diluted weighted average shares of common stock outstanding for the twelve months ended December 31, 2020 includes the weighted average effect of 628,403 prefunded warrants for the purchase of shares of common stock, which were issued in June 2020, and for which the remaining unfunded exercise price is $0.01 per share.

Diluted net loss per share attributable to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the weighted average number of common shares, including potential dilutive common shares assuming the dilutive effect of outstanding stock options and unvested restricted common shares, as determined using the treasury stock method. For periods in which the Company has reported net losses, diluted net loss per common share attributable to common stockholders is the same as basic net loss per common share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is antidilutive.

The Company excluded 2,008,902 and0 options to purchase common stock, outstanding as of December 31, 2020 and 2019, respectively, from the computation of diluted net loss per share for the twelve months ended December 31, 2020 and 2019, respectively, because they had an anti-dilutive impact due to the net loss incurred for the periods.

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

Recently Issued and Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB subsequently issued amendments to ASU 2016-13. This standard requires entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings and report credit losses using an expected losses model rather than the incurred losses model that was previously used, and establishes additional disclosures related to credit risks. For available-for-sale debt securities with unrealized losses, the standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. This standard limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. The Company adopted the standard on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This standard modifies certain disclosure requirements on fair value measurements. This standard became effective for the Company on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s disclosures.

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3. Merger Accounting

On May 28, 2020, the Company completed its merger with Zafgen. Based on the Exchange Ratio, immediately following the Merger, former Zafgen stockholders, Zafgen option holders and other persons holding securities or other rights directly or indirectly convertible, exercisable or exchangeable for Zafgen Common Stock (collectively, the “Zafgen Securityholders”) owned approximately 34% of the outstanding capital stock of the combined company, and Holdings, the former Chondrial stockholder, owned approximately 66% of the outstanding capital stock of the combined company. At the closing of the Merger, all shares of Chondrial Common Stock were exchanged for an aggregate of 6,091,250 shares of Zafgen Common Stock, after giving effect to the Reverse Stock Split.

In addition, pursuant to the terms of the Merger Agreement, the Company assumed all outstanding stock options to purchase shares of Zafgen common stock at the closing of the Merger. At the closing of the Merger, such stock options became options to purchase an aggregate of 328,770 shares of the Company’s common stock after giving effect to the Reverse Stock Split.

The total purchase price paid in the Merger has been allocated to the tangible and intangible assets acquired and liabilities assumed of Zafgen based on their fair values as of the completion of the Merger.Transaction costs primarily included bank fees and professional fees associated with legal counsel, auditors and printers. The following summarizes the purchase price paid in the Merger (in thousands, except share and per share amounts):

Multiplied by the fair value per share of Zafgen common stock(2) $ 11.88

Fair value of consideration issued in effect of the Merger $ 37,119

Transaction costs $ 1,715

The allocation of the purchase price for the Merger was based on estimates of the fair value of the net assets acquired, which was then adjusted for the difference between the purchase price and the fair value of the assets acquired. The following summarizes the allocation of the purchase price to the net tangible and intangible assets acquired (in thousands):

Cash and cash equivalents $ 40,595

Marketable debt securities 1,014

Other current and noncurrent assets 357

Property and equipment, net 398

Restricted cash 1,339

Right-of-use asset 3,806

Current liabilities (2,685 )

Lease liability, net of current portion (5,990 )

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4. Fair Value Measurements and Marketable Debt Securities

Fair Value Measurements

The Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2020 and December 31, 2019 are measured in accordance with the standards of ASC 820, Fair Value Measurements and Disclosures, which establishes a three-level valuation hierarchy for measuring fair value and expands financial statement disclosures about fair value measurements. The valuation hierarchy is based on upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts payable and accrued liabilities. For accounts payable and accrued liabilities, the carrying amounts of these financial instruments as of December 31, 2020 and December 31, 2019 were considered representative of their fair values due to their short term to maturity.

The following tables summarize the Company’s cash equivalents and marketable debt securities as of December 31, 2020. There were no cash equivalents and marketable debt securities as of December 31, 2019:

(in thousands)

Cash equivalents:

Money market funds $ 4,229 $ 4,229 $ — $ —

Marketable securities:

U.S Government securities 2,005 — 2,005 —

Marketable Debt Securities

The following tables summarize the Company’s marketable debt securities as of December 31, 2020. There were no marketable debt securities as of December 31, 2019:

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

(in thousands)

Assets:

U.S Government securities (due within 1 year) $ 2,005 $ — $ — $ 2,005

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As of December 31, 2020, the Company did not have an allowance for credit losses. All investments with unrealized losses at December 31, 2020 have been in a loss position for less than twelve months or the loss is not material and were temporary in nature. The Company does not intend to sell the investments that are in an unrealized loss position before recovery of their amortized cost basis.

5. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

December 31, December 31,

(in thousands)

Prepaid research and development expenses $ 4,460 $ 3,099

Prepaid insurance 571 $ 36

Payroll tax receivable 32 76

Capitalized transaction costs — 419

Research and development tax credit sale receivable — 82

Other prepaid expenses and other assets 251 29

Capitalized transaction costs as of December 31, 2019 consists of capitalized legal and proxy fees incurred by the Company, related to the Merger. These costs were included in the purchase price allocation when accounting for the Merger.

6. Fixed Assets

Fixed assets, net consisted of the following:

December 31, December 31,

(in thousands)

Computer equipment 5 years $ 66 $ 14

Furniture and fixtures 7 years 460 50

Less: Accumulated depreciation (335 ) (179 )

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

7. Accrued Expenses

Accrued expenses consisted of the following:

December 31, December 31,

(in thousands)

Accrued research and development expenses $ 3,409 $ 1,295

Accrued payroll and related expenses 1,350 627

Accrued professional fees 924 337

Accrued other 160 —

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8. Stockholders’ Equity and Stock Options

Common Stock and Prefunded warrants

As of December 31, 2020, the Company’s Certificate of Incorporation, as amended and restated, authorized the Company to issue 115,000,000 of $0.001 par value common stock and 5,000,000 of $0.001 par value preferred stock. The voting, dividend and liquidation rights of the holders of the Company’s common stock are subject to and qualified by the rights, powers and preferences of the holders of the preferred stock. Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors of the Company (the “Board”), if any. No cash dividends have been declared or paid to date.

On May 28, 2020, the Company entered into a securities purchase agreement with certain accredited investors (the “Purchasers”) for the sale by the Company in a private placement of 6,105,359 shares of the Company’s common stock and prefunded warrants to purchase an aggregate of 628,403 shares of the Company’s common stock, for a price of $11.88 per share of the common stock and $11.87 per prefunded warrant. The prefunded warrants are exercisable at an exercise price of $0.01 and will be exercisable indefinitely. The Purchasers may exercise the prefunded warrants on a cashless basis in the event that there is no effective registration statement covering the resale of the shares of common stock underlying the prefunded warrants on the date in which the Company is required to deliver the shares. The private placement closed on June 1, 2020. The aggregate gross proceeds for the issuance and sale of the common stock and prefunded warrants were $80.0 million; transaction costs totaled $4.6 million and resulted in net proceeds of $75.4 million. The Company’s Registration Statement on Form S-3, filed with the SEC on June 26, 2020, registered the resale of 6,105,359 shares of common stock sold and the 628,403 shares of common stock underlying the prefunded warrants.MTS Health Partners served as placement agent to the Company in connection with the private placement. As partial compensation for these services, we issued MTS Health Partners 35,260 shares of common stock.

Equity Distribution Agreement

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

Under the Agreement, the Company will set the parameters for the sale of ATM Shares, including the number of ATM Shares to be issued, the time period during which sales are requested to be made, limitations on the number of ATM Shares that may be sold in any one trading day and any minimum price below which sales may not be made. Sales of the ATM Shares, if any, under the Agreement may be made in transactions that are deemed to be “at-the-market offerings” as defined in Rule 415 under the Securities Act. The Company will pay its investment bank a commission equal to 3.0% of the gross proceeds of any ATM Shares sold through the investment bank under the Agreement and will reimburse investment bank for certain specified expenses. The Agreement contains customary representations, warranties and agreements by the Company, indemnification obligations of the Company and its investment bank, other customary obligations of the parties and termination provisions. The Company has no obligation to sell any of the ATM Shares and may at any time suspend offers under the Agreement. As of December 31, 2020, 11,524 Shares of common stock have been sold under the Agreement for net proceeds of $0.2 million at an average gross price per share of $21.89.

Summary of Plans

Upon completion of the Merger with Zafgen, Zafgen’s 2014 Stock Option and Incentive Plan (the “2014 Plan”) and Zafgen’s 2006 Stock Option Plan (the “2006 Plan” and together with the 2014 Plan the “Prior Plans”) were assumed by the Company. As described below, the Company adopted a new equity incentive plan in July 2020 that was approved by the stockholders in September 2020. These three plans are administered by the Board or, at the discretion of the Board, by a committee of the Board.

2020 Equity Incentive Plan

The Company’s Board of Directors adopted the 2020 Equity Incentive Plan (the 2020 Plan) on July 16, 2020 and the stockholders of the Company approved the 2020 Plan on September 29, 2020. The 2020 Plan replaces the 2014 Plan. Option outstanding under the Prior Plans will remain outstanding, unchanged and subject to the terms of the 2014 Plan and the respective award agreements, and no further awards will be made under the 2014 Plan.

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

The 2020 Plan provides for the grant of incentive stock options (“ISOs”), nonstatutory stock options (”NSO”), stock appreciation rights, restricted stock awards, restricted stock unit awards, and cash or other stock-based awards. ISOs may be granted only to the Company’s employees, including the Company’s officers, and the employees of the Company’s affiliates. All other awards may be granted to the Company’s employees, including the Company’s officers, the Company’s non-employee directors and consultants, and the employees and consultants of the Company’s affiliates.

As of December 31, 2020, 893,700 shares of common stock were available for grant under the 2020 Plan. The maximum number of shares that may be issued in respect of any awards under the 2020 Plan is the sum of: (i) 1,700,000 shares plus (ii) an annual increase on January 1, 2021 and each anniversary of such date thereafter through January 1, 2030, equal to the lesser of (A) 4% of the shares issued and outstanding on the last day of the immediately preceding fiscal year, and (B) such smaller number of shares as determined by the Board (collectively, the “Plan Limit”). The maximum aggregate number of shares that may be issued under the 2020 Plan in respect of incentive stock options is 8,000,000 over the ten-year term of the 2020 Plan. Subject to this provision, the Company added 614,709 shares available for grant to the 2020 Plan effective January 1, 2021 increasing the maximum number of shares of the Company’s common stock that may be issued under the 2020 plan to 2,314,709 shares.

2014 Stock Option and Incentive Plan and 2006 Stock Option Plan

In 2014, the Board and stockholders of Zafgen adopted the 2014 Plan. The 2014 Plan provided for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units, unrestricted stock awards, performance-share awards, cash-based awards and dividend equivalent rights to employees, members of the Board and consultants of the Company. The number of shares initially reserved for issuance under the 2014 Plan was 180,685 shares of common stock. As the 2020 Plan was adopted by the Company and approved by the Company’s stockholders, no further awards will be made under the Prior Plans.

2016 Equity and Incentive Plan

Under the 2016 Equity Plan adopted by Holdings on November 30, 2016, (the “2016 Equity Incentive Plan”), the Board of Managers of Holdings (the “Board of Managers”) or a committee thereof was authorized to issue 122,133 Common Units of Holdings or combination of Common Units, Common Unit options or profit interest units. On March 23, 2018, the Board of Managers increased the number of Common Units reserved for grant and issuance pursuant to the 2016 Plan from 122,133 to 138,133 and on April 29, 2019 increased the number of Common Units reserved for grant and issuance pursuant to the 2016 Plan by an additional 101,500 to 239,633. The Company has recorded costs incurred as stock-based compensation with a corresponding capital contribution from Holdings.

From January 1, 2020 through the Merger date Holdings did not issue options to purchase Common Units to employees of the Company. During the twelve months ended December 31, 2019 Holdings issued 73,986 options to purchase Common Units to employees of the Company.

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

The Company treated the conversion as a modification pursuant to ASC 718, Compensation—Stock Compensation, andcalculated the pre- and post-modification value of the options. The increase in fair value of the options was calculated to be $1.2 million. As $0.7 million related to vested options the expense was recognized immediately on the Merger date, and the remaining $0.5 million will be recognized over the remaining vesting term with the original grant date fair value remaining of $0.1 million.

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Stock Valuation

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

Risk-free interest rate 0.37% 1.92%

Expected term (in years) 6.08 6.25

Expected volatility 91% 77%

Stock Options

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

Weighted Weighted Average Aggregate

Average Remaining Intrinsic

Number of Exercise Contractual Value (a)

Shares Price Term (in years) (in millions)

Assumed as part of the Merger with Zafgen 328,770 74.80

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2020 Option Grants

On July 16, 2020, the Company granted options to purchase 549,774 shares of common stock to employees under the 2014 Plan. The options have an exercise price equal to the closing stock price as of the grant date, and vest over four years, with 25% vesting on the first anniversary of the grant and the remainder vesting in equal monthly installments thereafter.

In addition, in 2020 the Company granted options to purchase 806,300 shares of common stock to employees and directors under the 2020 Plan. The options granted to employees have an exercise price equal to the closing stock price as of the grant date, and vest over four years, with 25% vesting on the first anniversary of the grant and the remainder vesting in equal monthly installments thereafter. The options granted to directors have an exercise price equal to the closing stock price as of the grant date, and vest monthly in equal installments over three years.

January 2021 Option Grants

On January 19, 2021, the Company granted options to purchase 280,150 shares of common stock to employees under the 2020 Plan. The options have an exercise price equal to the closing stock price as of the grant date, and vest over four years, with 25% vesting on the first anniversary of the grant and the remainder vesting in equal monthly installments thereafter.

Stock-Based Compensation

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

Year Ended December 31,

(in thousands)

Research and development $ 788 $ 63

General and administrative 1,373 66

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

9. Commitments

Intellectual Property Licenses

The Company is party to a License Agreement (the “WFUHS License”), dated November 30, 2016 with Wake Forest University Health Sciences (“WFUHS”) and a License Agreement (the “IU License”), dated November 30, 2016, as amended, with Indiana University (“IU”). Such agreements provide for a transferable, worldwide license to certain patent rights regarding technology used by the Company with respect to the development of CTI-1601.

In partial consideration for the right and license granted under these agreements, the Company will pay each of WFUHS and IU a royalty of a low single digit percentage of net sales of licensed products depending on whether there is a valid patent covering such products. As additional consideration for these agreements, the Company is obligated to pay each of WFUHS and IU certain milestone payments of up to $2.6 million in the aggregate upon the achievement of certain developmental milestones, commencing on the enrollment of the first patient in a Phase 1 clinical trial. The Company will also pay each of WFUHS and IU sublicensing fees ranging from a high single digit to a low double-digit percentage of sublicense consideration depending on the Company’s achievement of certain regulatory milestones as of the time of receipt of the sublicense consideration. The Company is also obligated to reimburse WFUHS and IU for patent-related expenses. In the event that the Company disputes the validity of any of the licensed patents, the royalty rate would be tripled during such dispute. The Company is also obligated to pay to IU a minimum annual royalty of less than $0.1 million per annum starting in the 2020 calendar year for the term of the agreement.

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In the event that the Company is required to pay IU consideration, then the Company may deduct 20% of such IU consideration on a dollar-for-dollar basis from the consideration due to WFUHS. In the event that the Company is required to pay WFUHS consideration, then the Company may deduct 60% of such WFUHS consideration on a dollar-for-dollar basis from the consideration due to IU.

During the twelve months ended December 31, 2020 and 2019, no milestones were achieved and no expense was recognized. Both agreements continue from their effective date through the last to expire of the licensed patents unless earlier terminated by either party.

Leases

On August 8, 2019, the Company entered into an operating lease for office space in Bala Cynwyd, Pennsylvania, effective as of December 15, 2019, for a period of three years and six months with an option to extend the lease for three additional years. Due to required tenant improvements to be completed by the landlord, the Company did not take immediate possession of the leased property and the lease term commenced on February 15, 2020. In the quarter ended March 31, 2020, the Company recorded an operating lease right-of-use asset and operating lease liability of $0.4 million.

On May 28, 2020, as part of the Merger with Zafgen, the Company acquired a non-cancellable operating lease for approximately 17,705 square feet of office space (the “Premises”). The lease expires on October 30, 2029.As part of the agreement, the Company is required to maintain a letter of credit, which upon signing was $1.3 million and is classified as restricted cash within the consolidated financial statements. In addition to the base rent, the Company is also responsible for its share of operating expenses, electricity and real estate taxes, which costs are not included in the determination of the leases’ right-of-use assets or lease liabilities. The right-of-use asset is being amortized to rent expense over the remaining lease term. On October 27, 2020, the Company entered into a sublease agreement (the “Sublease”) with Massachusetts Municipal Association, Inc. (the “Subtenant”), whereby the Company subleased the entire Premises to the Subtenant. The term of the Sublease commenced on the December 4, 2020 and continues until October 30, 2029. In connection with this sublease, we evaluated the need for impairment under ASC 360 and determined that there was no impairment.

The Sublease provides for an initial annual base rent of $0.8 million, which increases annually up to a maximum annual base rent of $1.0 million. The Subtenant also is responsible for paying to the Company future increases in operating costs (commencing on January 1, 2022), future increases in annual tax costs (commencing July 1, 2021) and all utility costs (commencing March 1,2021) attributable to the Premises during the term of the Sublease. As part of the Sublease, the subtenant deposited a letter of credit in the amount of $0.8 million to assure their performance under the sublease. If there are no uncured events of default under the sublease, the amount of this security deposit decreases over time to $0.4 million on the sixth anniversary of the Sublease.

On November 5, 2018, the Company entered into an operating lease for office and lab space in Philadelphia, Pennsylvania, effective as of January 1, 2019, and expiring on December 31, 2020 with an option to extend the lease for each of the two additional years. On August 4, 2020, the Company executed the first option to extend the lease for an additional year, expiring on December 31, 2021. We have determined this lease extension qualifies as a short-term lease, as the remaining renewal option is not considered reasonably certain, for which we have applied the accounting policy election to not record the related right-of-use asset and lease liabilities.

Expense arising from operating leases was $0.7 million and less than $0.1 million during the twelve months ended December 31, 2020 and 2019, respectively. For operating leases, the weighted-average remaining lease term for leases at December 31, 2020 and December 31, 2019 was 8.6 and 3.3 years, respectively. For operating leases, the weighted average discount rate for leases at December 31, 2020 and December 31, 2019 was 11.0% and 12.0%, respectively. The Company has not entered into any financing leases.

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

Year Ending December 31, Operating

(in thousands) Leases

Total lease payments 9,982

Less: imputed interest (3,465 )

Present value of lease liabilities $ 6,517

10. Income Taxes

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

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

Years ended December 31,

A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:

Year Ended December 31,

Federal statutory income tax rate 21.0 % 21.0 %

State taxes, net of federal benefit 7.8 7.9

Federal and state research and development tax credit 13.5 0.0

Nondeductible permanent differences (0.2 ) 0.1

Change in deferred tax asset valuation allowance (42.1 ) (29.0 )

Effective income tax rate 0.0 % 0.0 %

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

Deferred tax assets:

Capitalized R&D Expenses $ 73,014 $ —

Stock Based Compensation 490 —

Tax credit carryforwards 8,904 62

Other Temporary Differences 50 690

Fixed Assets & Intangibles 75 —

Operating Lease Liability 1,786 —

Deferred tax liabilities:

Operating Right of Use Asset (1,081 ) —

Total deferred tax liabilities $ (1,081 ) $ —

Net deferred tax assets / (liabilities) $ — $ —

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

Years ended December 31,

Valuation allowance as of the beginning of the year $ 11,735 $ 5,300

Increases acquired as a result of the Merger with Zafgen 85,689 —

Increases recorded to income tax provision 17,895 6,435

As of December 31, 2020, the Company had net operating loss carryforwards that expire for federal, foreign and state income tax purposes of $113.2 million, $1.2 million and $113.2 million, respectively. The federal and state operating losses begin to expire in 2026 and 2030, while the foreign net loss carryforward can be carried forward indefinitely. As of December 31, 2020, the Company had federal net operating loss carryforwards that were generated after December 31, 2017 of $74.0 million that do not expire, however these carryforwards are limited to 80% of the taxable income in any one tax period. As of December 31, 2020, the Company also had available tax credit carryforwards for federal and state income tax purposes of $8.9 million which begin to expire in 2039. Utilization of the pre-Merger net operating loss carryforwards attributable to Zafgen, of approximately $33.5 million, are subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership changes occurred during the tax year associated with the Merger. In addition to the limitation of the pre-Merger NOL’s of Zafgen, the net capitalized R&D deferred tax assets in the amount of $73.0 million is subject to the built-in loss rules under Section 382 and may not be realized if the underlying asset associated with the R&D is disposed within five years of the Merger, or May 28, 2025. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. The ownership changes will limit the amount of pre-merger Zafgen carryforwards that can be utilized annually to offset future taxable income with an annual limitation of approximately $35 thousand per year. The Company has reduced their NOL and R&D tax credit deferred tax assets associated with the pre-Merger Zafgen operations as a result of the 382 analysis.

The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception associated with the pre-Merger Chondrial tax attributes. If the Company experienced a change of control, as defined by Section 382, at any time since inception, utilization of the pre-Merger Chondrial net operating loss carryforwards or tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or tax credit carryforwards before utilization. Further, until a study is completed, and any limitation is known, no amounts are being presented as an uncertain tax position.

As of December 31, 2020 and 2019, the Company’s net deferred tax asset balance before the valuation allowance was $115.3 million and $11.7 million, respectively, and was comprised principally of net operating loss carryforwards, capitalized research and development expenses and tax credit carryforwards. During the years ended December 31, 2020, and 2019, gross deferred tax assets increased due to deferred tax assets acquired as a result of the Merger with Zafgen, additional net operating loss carryforwards, research and development tax credits generated.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2020 and 2019. Management reevaluates the positive and negative evidence at each reporting period.

The Company has not recorded any amounts for unrecognized tax benefits as of December 31, 2020 and 2019. The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal

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course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending income tax examinations. The Company’s tax years are still open under statute from 2016 to the present. Earlier years may be examined to the extent that tax credit or net operating loss carryforwards are used in future periods. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision.

11. Related Party Transactions

In November 2016, the Company entered into a consulting agreement with Mark Payne, M.D (the “Consulting Engagement”). Dr. Payne was a director of Chondrial at that time, a full-time employee of IU and one of the inventors of the licensed IU intellectual property, and as such is entitled to a certain share of the revenues received by IU under the IU License. Pursuant to the terms of his consulting agreement the Company agreed to pay Dr. Payne $0.1 million per year over the term of the agreement and granted Dr. Payne 123,853 restricted Common Units in Holdings. On November 30, 2016, 30% vested and was associated with Chondrial Therapeutics IP, LLC (“IP LLC”) becoming a subsidiary of Holdings, which subsequently contributed to the Company on December 31, 2018. The remaining 70% is associated with future services (see Note 8) vesting ratably over 48 months beginning on December 1, 2016. The consulting agreement has a four-year term, subject to earlier termination. On November 30, 2020, The Company entered into a 1-month extension of the Consulting Engagement, expiring on December 31, 2020. During the twelve months ended December 31, 2020 and 2019, the Company recognized $0.1 million, related to this consulting agreement, recorded as research and development expense in the Statement of Operations. On January 1, 2021, the Company entered into a new consulting agreement with Mark Payne, M.D. which extended the term of the Consulting Engagement for a four-year term beginning on January 1, 2021.

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The funding to the Company originated from Holdings’ sale of Series A Preferred Units and Series B convertible preferred units with Deerfield Private Design Fund IV, L.P., Deerfield Private Design Fund III, L.P. and Deerfield Health Innovations Fund, L.P. (together, the “Deerfield Funds”), and certain other purchasers, from inception through May 28, 2020 and the contribution of the proceeds received by Holdings on such sales to the Company in order to fund the Company’s operations.

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

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

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

During the twelve months ended December 31, 2020 and 2019, Holdings provided the Company non-interest bearing, permanent funding from the above Series A and Series B preferred unit transactions, totaling $18.0 million and $19.4 million, respectively, which has been recorded as capital contributions with the balance of combined equity and additional paid in capital on the consolidated balance sheets and consolidated statements of changes in stockholders’ equity for each respective period. No contributions were made by Holdings subsequent to the Merger.

In December 2020, the Company purchased a piece of laboratory equipment for $0.5 million from a supplier that one of our Board members is also a member of this supplier’s board of directors. This purchase was billed at market rates with market payment terms.

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