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Stockholders' Equity and Stock Options
 9 Months Ended
Sep. 30, 2021
Stockholders Equity Note [Abstract]  
Stockholders' Equity and Stock Options
8.
Stockholders’ Equity and Stock Options

Common Stock and Prefunded warrants

As of September 30, 2021, the Company’s Certificate of Incorporation, as amended and restated, authorized the Company to issue up to 115,000,000 shares of $0.001 par value common stock, of which 17,710,450 shares were issued and outstanding, and up to 5,000,000 shares of $0.001 par value undesignated preferred stock, of which no shares were issued or outstanding. 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 are 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, the Company issued MTS Health Partners 35,260 shares of common stock.

Equity Distribution Agreement

On August 14, 2020, the Company entered into 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 common stock (the “ATM Shares”) from time to time (the “Offering”).

Under the ATM Agreement, the Company sets 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 ATM 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 pays its investment bank a commission equal to 3.0% of the gross proceeds of any ATM Shares sold through its investment bank under the ATM Agreement and reimburses the investment bank for certain specified expenses. The ATM 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 ATM Agreement.

In July 2021, the Company sold 2,342,720 shares under the ATM Agreement for net proceeds of $19.9 million.

As of September 30, 2021, 2,354,244 shares of Common Stock have been sold under the ATM Agreement for net proceeds of $20.1 million. As of November 10, 2021, approximately $29.2 million shares of common stock remained available for sale by the Company under the ATM Agreement.

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 Board 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 Prior Plans and the respective award agreements, and no further awards will be made under the 2014 Plan. However, if any award previously granted under the Prior Plans, expires, terminates, is canceled, or is forfeited for any reason after the approval of the 2020 Plan, the shares subject to that award will be added to the 2020 Plan 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 (“NSOs”), 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.

 

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”). As permitted by the 2020 Plan, the Company added 614,709 shares available for grant to the 2020 Plan on 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. The maximum aggregate number of shares that may be issued under the 2020 Plan in respect of ISOs is 8,000,000 over the ten-year term of the 2020 Plan. On May 28, 2021, options to purchase 38,090 shares issued under the 2014 Plan were cancelled and became available for grant under the 2020 Plan. As of September 30, 2021, 971,349 shares of common stock were available for grant under the 2020 Plan.

 

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.

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

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

Stock Valuation

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

 

 

 

September 30,

 

December 31,

 

 

2021

 

2020

Risk-free interest rate

 

0.88%

 

0.37%

Expected term (in years)

 

6.19

 

6.08

Expected volatility

 

91%

 

91%

Dividend yield

 

0.00%

 

0.00%

 

Stock Options

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2021 (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)

 

Outstanding as of December 31, 2020

 

 

2,008,902

 

 

$

22.31

 

 

 

7.9

 

 

 

 

Granted

 

 

617,150

 

 

 

15.62

 

 

 

 

 

 

 

Forfeited/Expired

 

 

(80,090

)

 

 

62.42

 

 

 

 

 

 

 

Outstanding as of September 30, 2021

 

 

2,545,962

 

 

$

19.43

 

 

 

7.8

 

 

$

0.4

 

Exercisable as of September 30, 2021

 

 

944,249

 

 

$

29.29

 

 

 

5.8

 

 

$

—

 

Vested and expected to vest as of September 30, 2021

 

 

2,545,962

 

 

$

19.43

 

 

 

7.8

 

 

$

0.4

 
(a)
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the fair value of the common stock for the options that were in the money at September 30, 2021.

2021 Option Grants

During the nine months ended September 30, 2021, the Company granted options to purchase 617,150 shares of common stock to employees and directors of the Company under the 2020 Plan. The options have an exercise price equal to the closing stock price as of the grant date. Of the 617,150 options granted in 2021, 567,350 vest over four years, with 25% vesting on the first anniversary of the grant and the remainder vesting in equal monthly installments thereafter. The remaining 49,800 options were annual grants to the Company's directors and vest one year from the grant date.

Stock-Based Compensation

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

 

 

 

 

 

 

Research and development

 

$

567

 

 

$

231

 

 

$

1,520

 

 

$

442

 

General and administrative

 

 

896

 

 

 

139

 

 

 

2,473

 

 

 

709

 

 

 

$

1,463

 

 

$

370

 

 

$

3,993

 

 

$

1,151

 
As of September 30, 2021, total unrecognized compensation expense related to unvested stock options and restricted stock units was $16.2 million, which is expected to be recognized over a weighted average period of 2.88 years.