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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 001-39263
Zentalis Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
Delaware82-3607803
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
530 Seventh Avenue,
Suite 2201
New York,
 New York
10018
(Address of principal executive offices)(Zip Code)
(212) 433-3791
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock,
$0.001 par value per share
ZNTLThe Nasdaq Global Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ☒  No ☐   
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  Accelerated filer
Non-accelerated Filer
  Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☒
As of November 5, 2020, the registrant had 40,613,857 shares of common stock, $0.001 par value per share, outstanding.


Table of Contents
Page
PART I.
Item 1.
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
i


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. All statements other than statements of historical fact contained in this Quarterly Report, including without limitation statements regarding our future results of operations and financial position, the anticipated impact of the novel coronavirus (“COVID-19”) pandemic on our business, business strategy, prospective products and product candidates, clinical trial timelines and expected timing for the release of data, research and development costs, future revenue, timing and likelihood of success, potential collaboration opportunities, and plans and objectives of management are forward-looking statements.
The forward-looking statements in this Quarterly Report are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of known and unknown risks, uncertainties, assumptions and other important factors, including those described under the sections in this Quarterly Report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report.
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

SUMMARY RISK FACTORS
Our business is subject to numerous risks and uncertainties, including those described in Part II, Item
1A. “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and
uncertainties when investing in our ordinary shares. The principal risks and uncertainties affecting our business include the following:

We have a limited operating history, have not completed any clinical trials, and have no products
approved for commercial sale, which may make it difficult for you to evaluate our current business
and predict our future success and viability.

We have incurred significant net losses since inception and we expect to continue to incur significant net losses for the foreseeable future.

We will require substantial additional capital to finance our operations. If we are unable to raise
such capital when needed, or on acceptable terms, we may be forced to delay, reduce or eliminate
one or more of our research and drug development programs or future commercialization efforts.

We are substantially dependent on the success of our lead product candidate, ZN-c5, which is
currently in clinical trials. If we are unable to complete development of, obtain approval for and
commercialize ZN-c5 in a timely manner, our business will be harmed.

The outcome of preclinical testing and early clinical trials may not be predictive of the success of
later clinical trials, and the results of our clinical trials may not satisfy the requirements of the FDA, EMA or other comparable foreign regulatory authorities.

We may face additional risks associated with the development of ZN-c5, ZN-c3, ZN-d5, ZN-e4 and
potentially other product candidates in combination with other therapies.

The clinical trial and regulatory approval processes are lengthy, time consuming and inherently
unpredictable, and we may incur additional costs or experience delays in completing, or ultimately
be unable to complete, the development and commercialization of our product candidates.

The competition for qualified personnel is particularly intense in our industry. If we are unable to retain or hire key personnel, we may not be able to sustain or grow our business.

We face significant competition, and if our competitors develop and market technologies or products
more rapidly than we do or that are more effective, safer or less expensive than the product
ii


candidates we develop, our commercial opportunities will be negatively impacted.

Our success depends on our ability to protect our licensed-in intellectual property and our
proprietary technologies. If we are unable to adequately protect our licensed-in intellectual property and our proprietary technologies, or obtain and maintain issued patents which are sufficient to protect our product candidates, others could compete against us more directly, which would negatively impact our business.

Our existing collaborations are important to our business and future licenses may also be important
to us, and if we are unable to maintain any of these collaborations, or if these arrangements are not successful, our business could be adversely affected.

We rely, and expect to continue to rely, on third parties, including independent clinical investigators
and CROs, to conduct certain aspects of our preclinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties, comply with applicable regulatory requirements or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.

Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties. Claims by third parties that we infringe their proprietary rights may result in liability for damages or prevent or delay our developmental and commercialization efforts.

The outbreak of the novel strain of coronavirus disease, COVID-19, had adversely impacted and we
expect will continue to adversely impact our business, including our preclinical studies and clinical trials.
iii


BASIS OF PRESENTATION
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to “we,” “us,” “our,” the “Company,” “Zentalis” and similar references refer: (1) following the consummation of our statutory conversion to a Delaware corporation on April 2, 2020 in connection with our initial public offering, to Zentalis Pharmaceuticals, Inc., and (2) prior to the completion of such conversion, to Zentalis Pharmaceuticals, LLC. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”—“Corporate Conversion” in this Quarterly Report on Form 10-Q for further information.
iv


PART I—FINANCIAL INFORMATION
3


Item 1. Financial Statements.
Zentalis Pharmaceuticals, Inc. (Successor to Zentalis Pharmaceuticals, LLC)
FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except unit and share amounts)
September 30,December 31,
 20202019
ASSETS
Current assets
Cash and cash equivalents$92,552 $67,246 
Marketable securities, available-for-sale274,884  
Accounts receivable from government grants, net122 140 
Prepaid expenses and other current assets5,178 1,505 
Total current assets372,736 68,891 
Property and equipment, net471 501 
Operating lease right-of-use assets1,925 2,335 
Prepaid expenses and other assets4,245 2,134 
Deferred financing costs 841 
Goodwill3,736 3,736 
In-process research and development8,800 8,800 
Restricted cash1,320 243 
Total assets$393,233 $87,481 
LIABILITIES, CONVERTIBLE PREFERRED UNITS AND EQUITY/(DEFICIT)
Current liabilities
Accounts payable$5,437 $4,289 
Accrued expenses18,469 10,608 
Total current liabilities23,906 14,897 
Deferred tax liability2,463 2,463 
Other long-term liabilities1,031 1,700 
Total liabilities27,400 19,060 
Commitments and contingencies
Convertible preferred units; Redemption value of $146,944,000 at December 31, 2019
 141,706 
EQUITY (DEFICIT)
Class A common units; 20,000,000 units authorized; 5,601,478 units issued and outstanding at December 31, 2019
 709 
Class B common units, 3,458,522 units authorized; 2,670,668 units issued and outstanding at December 31, 2019
 2,178 
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2020
  
Common stock, $0.001 par value; 250,000,000 shares authorized; 40,614,453 shares issued and outstanding at September 30, 2020
41  
Additional paid-in capital
501,522  
Accumulated other comprehensive income23  
Accumulated deficit(160,531)(82,993)
Total stockholders’ equity/members’ (deficit)341,055 (80,106)
Noncontrolling interests24,778 6,821 
Total equity (deficit)365,833 (73,285)
Total liabilities, convertible preferred units and equity (deficit)$393,233 $87,481 

See notes to condensed consolidated financial statements.


4


Zentalis Pharmaceuticals, Inc. (Successor to Zentalis Pharmaceuticals, LLC)
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per unit and per share amounts)
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020 201920202019
Operating Expenses 
Research and development$24,670 $10,739 $55,380 $26,517 
General and administrative10,097 1,844 23,162 5,423 
Total operating expenses34,767 12,583 78,542 31,940 
Operating loss(34,767)(12,583)(78,542)(31,940)
Other Income (Expense)
Investment and other income, net120 12 368 123 
Net loss before income taxes(34,647)(12,571)(78,174)(31,817)
Income tax expense18 1 18 15 
Net loss(34,665)(12,572)(78,192)(31,832)
Net loss attributable to noncontrolling interests(110)(228)(654)(675)
Net loss attributable to Zentalis $(34,555)$(12,344)$(77,538)$(31,157)
Net loss per common share outstanding, basic and diluted
$(0.91)$ $(3.21)$ 
Net loss per Class A common unit outstanding, basic and diluted
$ $(2.20)$ $(5.56)
Common shares/units used in computing net loss per share/Class A common unit, basic and diluted
37,959 5,601 24,143 5,601 

See notes to condensed consolidated financial statements.
5


Zentalis Pharmaceuticals, Inc. (Successor to Zentalis Pharmaceuticals, LLC)
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(In thousands)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Net loss(34,665)(12,572)(78,192)(31,832)
Other comprehensive income:
Unrealized gain on marketable securities
19  23  
Total comprehensive loss$(34,646)$(12,572)$(78,169)$(31,832)
Comprehensive loss attributable to noncontrolling interests
(110)(228)(654)(675)
Comprehensive loss attributable to Zentalis
$(34,536)$(12,344)$(77,515)$(31,157)

See notes to condensed consolidated financial statements.
6


Zentalis Pharmaceuticals, Inc. (Successor to Zentalis Pharmaceuticals, LLC)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
 Nine Months Ended
September 30,
 20202019
Operating Activities: 
Consolidated net loss$(78,192)$(31,832)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization127 70 
Share-based compensation15,259 405 
Amortization of premiums on marketable securities, net224  
Changes in operating assets and liabilities:
Accounts receivable18 867 
Prepaid expenses and other assets(5,784)(833)
Accounts payable and accrued liabilities9,049 5,155 
Operating lease right-of-use assets and liabilities, net(169)216 
Net cash used in operating activities(59,468)(25,952)
Investing activities:
Purchases of marketable securities(304,085) 
Proceeds from maturities of marketable securities29,000  
Purchases of property and equipment(97)(316)
Net cash used in investing activities(275,182)(316)
Financing Activities:
Proceeds from issuance of common stock in initial public offering, net172,482  
Contributions from noncontrolling interest owners, net18,424  
Proceeds from the issuance of Series C convertible preferred units, net14,228 81,883 
Proceeds from issuance of common stock, net155,899  
Net cash provided by financing activities361,033 81,883 
Net increase in cash, cash equivalents and restricted cash26,383 55,615 
Cash, cash equivalents and restricted cash at beginning of period67,489 25,154 
Cash, cash equivalents and restricted cash at end of period$93,872 $80,769 
Supplemental disclosure of non-cash investing and financing activities:
Right-of-use assets obtained in exchange for operating lease liabilities$ $1,412 
Costs incurred in connection with equity offering included in accounts payable and accrued liabilities$594 $ 
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Statements of Cash Flows for the periods presented:
7


September 30,
20202019
Cash and cash equivalents$92,552 $80,526 
Restricted cash, non-current1,320 243 
Total cash, cash equivalents and restricted cash reported in the Consolidated Statement of Cash Flows
$93,872 $80,769 
See notes to condensed consolidated financial statements.
8


Zentalis Pharmaceuticals, Inc. (Successor to Zentalis Pharmaceuticals, LLC)
Condensed Consolidated Statements of Changes in Convertible Preferred Units and Members’/Stockholders’ Equity/(Deficit)
(In thousands)

Three Months Ended September 30, 2020
Zentalis Stockholders
Common
Additional
Paid-In
Capital
Accumulated Other Comprehensive IncomeAccumulated
Deficit
Noncontrolling
Interests
Total
Equity
(Deficit)
SharesAmount
Balance at June 30, 202035,878 $36 $339,160 $4 $(125,976)$24,701 $237,925 
Share-based compensation expense
— — 7,249 — — — 7,249 
Issuance of common stock in connection with an equity offering, net of underwriting discounts, commissions and offering costs4,744 5 155,300 — — — 155,305 
Cancellation of restricted stock awards(7)— — — — — — 
Other comprehensive income
— — — 19 — — 19 
Net loss attributable to noncontrolling interest— — (187)— — 77 (110)
Net loss attributable to Zentalis
— — — — (34,555)— (34,555)
Balance at September 30, 202040,615 $41 $501,522 $23 $(160,531)$24,778 $365,833 

9


Nine Months Ended September 30, 2020
Zentalis Members/Stockholders
 Convertible
Preferred Units
Convertible
Preferred Units
Class A
Common Units
 
Class B
Common Units
 CommonAdditional
Paid-In
Capital
Accumulated Other Comprehensive IncomeAccumulated
Deficit
Noncontrolling
Interests
Total
Equity
(Deficit)
 UnitsAmountUnitsAmountUnitsAmountUnitsAmount SharesAmount
Balance at December 31, 20199,950 $141,706 — $— 5,601 $709 2,671 $2,178  $ $ $ $(82,993)$6,821 $(73,285)
Issuance of Series C convertible preferred units at $17.50 per unit net of issuance costs
867 14,228 — — — — — — — — — — — — — 
Cancellation of profit interest awards, net
— — — — — — (64)— — — — — — — — 
Issuance of common stock in connection with an initial public offering, net of underwriting discounts, commissions and offering costs — — — — — — — — 10,589 11 172,354 — — — 172,365 
Contributions from noncontrolling interest owners— — — — — — — — — — — — — 18,424 18,424 
Share-based compensation expense
— — — — — — — 329 — — 14,930 — — — 15,259 
Conversion of convertible preferred units to common stock
(10,817)(155,934)— — — — — — 15,011 15 155,919 — — — 155,934 
Conversion of common and incentive units to common and restricted stock— — — — (5,601)(709)(2,607)(2,507)10,278 10 3,206 — — — — 
Issuance of common stock in connection with an equity offering, net of underwriting discounts, commissions and offering costs— — — — — — — — 4,744 5 155,300 — — — 155,305 
Cancellation of restricted stock awards— — — — — — — — (7)— — — — — — 
Other comprehensive income
— — — — — — — — — — — 23 — — 23 
Net loss attributable to noncontrolling interest— — — — — — — — — — (187)— — (467)(654)
Net loss attributable to Zentalis
— — — — — — — — — — — — (77,538)— (77,538)
Balance at September 30, 2020 $ — $—  $  $$ 40,615 $41 $501,522 $23 $(160,531)$24,778 $365,833 










10




Three Months Ended September 30, 2019
Zentalis Members
Convertible
Preferred Units
Convertible
Preferred Units
Class A
Common Units
 
Class B
Common Units
Accumulated
Deficit
Noncontrolling
Interests
Total
Equity
(Deficit)
UnitsAmountUnitsAmountUnitsAmountUnitsAmount
Balance at June 30, 2019 $ 5,103 $59,830 5,594 $676 1,669 $1,844 $(56,143)$7,089 $13,296 
Issuance of Series C convertible preferred units at $17.50 per unit net of issuance costs
4,847 81,883 — — — — — — — —  
Reclassification of convertible preferred units for contingent liquidation features not within the Company's control
5,103 59,830 (5,103)(59,830)— — — — — — (59,830)
Issuance of profit interest awards, net
— — — — — — 278 — — — — 
Share-based compensation expense
— — — — — 2 — 153 — — 155 
Net loss attributable to noncontrolling interest— — — — — — — — — (228)(228)
Net loss attributable to Zentalis
— — — — — — — — (12,344)— (12,344)
Balance at September 30, 20199,950 $141,713  $ 5,594 $678 1,947 $1,997 $(68,487)$6,861 $(58,951)







11


Nine Months Ended September 30, 2019
Zentalis Members
 Convertible
Preferred Units
Convertible
Preferred Units
Class A
Common Units
Class B
Common Units
 Accumulated
Deficit
Noncontrolling
Interests
Total
Equity
(Deficit)
 UnitsAmountUnitsAmountUnitsAmountUnitsAmount
Balance at December 31, 2018 $ 5,103 $59,830 5,594 $672 1,612 $1,598 $(37,330)$7,536 $32,306 
Issuance of Series C convertible preferred units at $17.50 per unit net of issuance costs
4,847 81,883 — — — — — — — —  
Reclassification of convertible preferred units for contingent liquidation features not within the Company's control
5,103 59,830 (5,103)(59,830)— — — — — — (59,830)
Issuance of profit interest awards, net
— — — — — — 335 — — — — 
Share-based compensation expense
— — — — — 6 — 399 — — 405 
Net loss attributable to noncontrolling interest— — — — — — — — — (675)(675)
Net loss attributable to Zentalis
— — — — — — — — (31,157)— (31,157)
Balance at September 30, 20199,950 $141,713  $ 5,594 $678 1,947 $1,997 $(68,487)$6,861 $(58,951)

See notes to condensed consolidated financial statements.
12


Zentalis Pharmaceuticals, Inc. (Successor to Zentalis Pharmaceuticals, LLC)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Organization
Zentalis Pharmaceuticals, Inc. (successor to Zentalis Pharmaceuticals, LLC) (“Zentalis”, “We” or the “Company”) is a clinical-stage pharmaceutical company focused on discovering and developing clinically differentiated, novel small molecule therapeutics targeting fundamental biological pathways of cancer. The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. To date, all of the Company’s revenue has been generated in the United States. All of the Company’s tangible assets are held in the United States.
The Company was formed and incorporated in the state of Delaware as Zeno Pharmaceuticals, Inc. on December 23, 2014. Effective November 21, 2017, Zeno Pharma, LLC was formed by the shareholders of Zeno Pharmaceuticals, Inc. On December 21, 2017, Zeno Pharmaceuticals, Inc. became a wholly owned subsidiary of Zeno Pharma, LLC. In connection with this restructuring, the rights and preferences of the Preferred Stock of Zeno Pharmaceuticals, Inc. were exchanged for preferred units with similar rights and preferences of Zeno Pharma, LLC. As part of the restructuring, the employees, consultants and board members of Zeno Pharmaceuticals, Inc. exchanged their equity grants in Zeno Pharmaceuticals, Inc. stock for Class B common units in Zeno Pharma, LLC. Additionally, existing common stockholders of Zeno Pharmaceuticals, Inc. exchanged their common stock for Class A common units in Zeno Pharma, LLC. All exchanges were made on a one-for-one basis. The restructuring was accounted for as a common control transaction. In December 2019, the Company was renamed to Zentalis Pharmaceuticals, LLC.
Immediately prior to the effectiveness of the registration statement pertaining to the Company’s initial public offering (“IPO”) on April 2, 2020, the Company converted from a Delaware limited liability company into a Delaware corporation, and changed its name to Zentalis Pharmaceuticals, Inc. Pursuant to the statutory corporate conversion, all of the outstanding units of Zentalis Pharmaceuticals, LLC converted into shares of common stock of Zentalis Pharmaceuticals, Inc. based upon the value of Zentalis Pharmaceuticals, Inc. at the time of the IPO with a value implied by the price of the shares of common stock sold in the IPO. Based on the IPO price of $18.00 per share, the outstanding units converted into 25,288,854 shares of common stock (including 1,160,277 shares of restricted common stock).
On April 7, 2020, the Company completed the IPO in which the Company issued and sold 10,557,000 shares of common stock (including 1,377,000 shares of common stock in connection with the full exercise of the underwriters’ option to purchase additional shares) at a public offering price of $18.00 per share. The Company’s aggregate gross proceeds from the sale of shares in the IPO, including the sale of shares pursuant to the full exercise of the underwriters’ option to purchase additional shares, was $190.0 million before fees and expenses of $17.6 million.
On May 19, 2020, the Company announced the closing of a Series A financing of Zentera Therapeutics, Ltd. (“Zentera”), a majority owned biopharmaceutical company with headquarters in Shanghai, China. Contributions from noncontrolling interest members totaled $20.0 million before issuing costs of $1.6 million. The Company holds 60.2% equity interest in Zentera for purposes of the development and commercialization of ZN-c5, ZN-d5 and ZN-c3 for the treatment or preventions of disease, other than for pain, in the People’s Republic of China, Macau, Hong Kong and Taiwan. Two of our executives entered into restricted stock purchase agreements with Zentera. The associated shares vest over four years.

On August 3, 2020, the Company completed a follow-on offering in which the Company issued and sold 4,743,750 shares of common stock (including 618,750 shares of common stock in connection with the full exercise of the underwriters’ option to purchase additional shares) at a public offering price of $35.00 per share. The
13


Company’s aggregate gross proceeds from the sale of shares in the follow-on offering, including the sale of shares pursuant to the full exercise of the underwriters’ option to purchase additional shares, was $166.0 million before fees and expenses of $10.8 million.
Liquidity
Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year from the financial statement issuance date. The Company determined that there are no conditions or events that raise substantial doubt about its ability to continue as a going concern within one year after the date that the interim unaudited condensed consolidated financial statements for the quarter ended September 30, 2020 are issued.
2. Interim Unaudited Financial Statements
Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. The year-end condensed consolidated balance sheet data was derived from the Company’s audited financial statements but does not include all disclosures required by U.S. GAAP. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2019 included in the Company’s final prospectus for its IPO, filed pursuant to Rule 424(b) under the Securities Exchange Act of 1933, as amended, with the SEC on April 6, 2020. The unaudited financial information for the interim periods presented herein reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operation for the periods presented, with such adjustments consisting only of normal recurring adjustments.
The condensed consolidated financial statements include the accounts of our wholly owned subsidiaries, majority-owned or controlled companies, and variable interest entity (“VIE”), Kalyra Pharmaceuticals, Inc. (“Kalyra”), for which we are the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
Noncontrolling Interest
The shares third parties own in Kalyra and Zentera represent an interest in their respective equity we do not control. We reflect the noncontrolling interest attributable to other owners in a separate line in our condensed consolidated statement of operations and a separate line within stockholders’ equity in our condensed consolidated balance sheet. In addition, we record a noncontrolling interest adjustment to account for equity based compensation in Zentera. This adjustment is a reclassification within stockholders’ equity from additional paid-in capital to noncontrolling interest equal to the amount of equity based compensation expense Zentera had recognized.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and judgments, which are based on historical and anticipated results and trends and on various other assumptions that management believes to be reasonable under the circumstances. By their nature, estimates are subject to an inherent degree of uncertainty and, as such, actual results may differ from management’s estimates.
Though the impact of the COVID-19 pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to inform our critical accounting estimates.
14


Marketable Securities
Marketable securities are investments with original maturities of more than ninety days from the date of purchase that we have the ability to liquidate to fund current operations. Accordingly, those investments with contractual maturities greater than one year from the date of purchase are classified as short-term investments on the accompanying condensed consolidated balance sheets Marketable securities are considered available-for-sale and are carried at fair value with unrealized gains and losses recorded in other comprehensive income (loss) and included as a separate component of stockholders’ deficit. The cost of marketable securities is adjusted for amortization of premiums or accretion of discounts to maturity, and such amortization or accretion is included in investment and other income, net in the interim unaudited condensed consolidated statements of operations. We assess whether our available-for-sale debt securities in an unrealized loss position have credit-related losses and record such losses, and any subsequent improvements as interest income, through an allowance account. We use the specific identification method for calculating realized gains and losses on marketable securities sold. Realized gains and losses on marketable securities, if any, are included in investment and other income, net in the interim unaudited condensed consolidated statements of operations.
15


Adoption and Pending Adoption of Recent Accounting Pronouncements
The following table provides a brief description of recently issued accounting standards, those adopted in the current period and those not yet adopted:
Standard  Description  Effective Date  Effect on the Financial
Statements or Other
Significant Matters
In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial InstrumentsThis guidance makes improvements to financial instruments guidance, including the current expected credit losses guidance.January 1, 2020We have adopted the new guidance as of January 1, 2020. The impact of the adoption was not material to the consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities (Topic 321)This standard clarifies the interaction between accounting standards related to equity securities (ASC 321), equity method investments (ASC 323), and certain derivatives (ASC 815). January 1, 2021We currently do not hold equity securities, have equity method investments or derivatives. We do not believe the adoption will have a material impact on our consolidated financial position or results of operations.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. In November 2018 and April and May of 2019, the FASB issued additional guidance related to Topic 326.The standard amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income.January 1, 2020We have adopted the new guidance on January 1, 2020. The impact of the adoption was not material to the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes.The new guidance is intended to simplify aspects of the accounting for income taxes, including the elimination of certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, among other changes.January 1, 2020We have adopted the new guidance on January 1, 2020. The impact of the adoption was not material to the consolidated financial statements.
3. Business Combinations
Kalyra Pharmaceuticals, Inc.
On December 21, 2017, we acquired $4.5 million of Kalyra’s Series B Preferred Stock representing a 25% equity interest in Kalyra for purposes of entering the analgesics therapeutic research space. The acquisition price was paid entirely in cash.
16


In accordance with the authoritative guidance, we concluded that Kalyra is a business consisting of inputs, employees, intellectual property and processes capable of producing outputs. Additionally, we have concluded that Kalyra is a variable interest entity, we are the primary beneficiary and have the power to direct the activities that most significantly affect Kalyra’s economic performance through common management and our board representation. Prior to the change of control, Zentalis and Kalyra transacted for the delivery of research and development services and support. The financial position and results of operations of Kalyra have been included in our consolidated financial statements from the date of the initial investment.
Pursuant with authoritative guidance, we have recorded the identifiable assets, liabilities and noncontrolling interests in the VIE at their fair value upon initial consolidation. The identified goodwill is comprised of the workforce and expected synergies from combining the entities. Total assets and liabilities of Kalyra as of September 30, 2020 and December 31, 2019 are as follows (in thousands):
September 30,December 31,
 20202019
Cash and cash equivalents$417 $712 
Other current assets31 21 
In-process research and development8,800 8,800 
Goodwill3,736 3,736 
Other long-term assets14 14 
Accounts payable and accrued expenses87 391 
Deferred tax liability2,463 2,463 
Noncontrolling interests$6,635 $6,821 
The liabilities recognized as a result of consolidating Kalyra do not represent additional claims on our general assets. Pursuant to the authoritative guidance, the equity interest in Kalyra not owned by Zentalis is reported as a noncontrolling interest on our consolidated balance sheets.
The following is a reconciliation of equity (net assets) attributable to the noncontrolling interest (in thousands):
September 30,
 2020
Noncontrolling interest at beginning of period$6,821 
Net loss attributable to noncontrolling interest(186)
Noncontrolling interest at end of period$6,635 
4. Fair Value Measurement
Available-for-sale marketable securities consisted of the following (in thousands):
17


September 30, 2020
Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Commercial paper $125,748 $9 $(7)$125,750 
Corporate debt securities
31,840 5 (3)31,842 
US government agencies
77,523 22 (5)77,540 
US Treasury securities39,750 3 (1)39,752 
$274,861 $39 $(16)$274,884 
As of September 30, 2020, 19 of our available-for-sale debt securities with a fair market value of $85.3 million were in a gross unrealized loss position of sixteen thousand. When evaluating an investment for impairment, we review factors such as the severity of the impairment, changes in underlying credit ratings, forecasted recovery, our intent to sell or the likelihood that we would be required to sell the investment before its anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. Based on our review of these marketable securities, we believe none of the unrealized loss is as a result of a credit loss as of September 30, 2020, because we do not intend to sell these securities and it is not more-likely-than-not that we will be required to sell these securities before the recovery of their amortized cost basis.
Contractual maturities of available-for-sale debt securities are as follows (in thousands):

September 30, 2020
Estimated Fair Value
Due within one year$239,291 
After one but within five years35,593 
$274,884 

The following table summarizes, by major security type, our cash equivalents and available-for-sale marketable securities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands):
18


September 30, 2020December 31, 2019
Level 1Level 2Total estimated fair valueLevel 1Level 2Total estimated fair value
Cash equivalents:
Money market funds
$29,924 $ $29,924 $62,961 $ $62,961 
US government agencies
 2,631 2,631    
US Treasury securities
9,999  9,999    
Corporate debt securities
 14,999 14,999    
Total cash equivalents:
39,923 17,630 57,553 62,961  62,961 
Available-for-sale marketable securities:
Commercial paper
 125,750 125,750    
Corporate debt securities
 31,842 31,842    
US government agencies
 77,540 77,540    
US Treasury securities
39,752  39,752    
Total available-for-sale marketable securities:
39,752 235,132 274,884    
Total assets measured at fair value
$79,675 $252,762 $332,437 $62,961 $ $62,961 

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2020. We had no instruments that were classified within Level 3 as of September 30, 2020 or December 31, 2019.
5. Prepaid Expenses and Other Assets
Prepaid expenses and other assets consisted of the following (in thousands):
September 30,December 31,
 20202019
Prepaid insurance
$1,761 $