SEC Filing | Zentalis Pharmaceuticals

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zntl-20210930

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, 2021

☐ 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)


Delaware			82-3607803
(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 class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	ZNTL	The Nasdaq Stock Market LLC (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 9, 2021, the registrant had 45,305,544 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statements of Comprehensive Loss	6
	Condensed Consolidated Statements of Cash Flows	7
	Condensed Consolidated Statement of Members’ Equity (Deficit) and Changes in Redeemable Convertible Preferred Stock	9
	Notes to Condensed Consolidated Financial Statements	13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	48
PART II.	OTHER INFORMATION	49
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	111
Item 3.	Defaults Upon Senior Securities	111
Item 4.	Mine Safety Disclosures	111
Item 5.	Other Information	111
Item 6.	Exhibits	111
	Signatures	113

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 COVID-19 pandemic on our business, the sufficiency of our cash and cash equivalents to fund our operations, 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, activities under our existing collaborations and 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 “Summary Risk Factors” below and in 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 risk 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 risk and uncertainties when investing in our common stock. These 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 candidates, ZN-c3 and ZN-c5, which are currently in clinical trials. If we are unable to complete development of, obtain approval for and commercialize ZN-c3 and/or 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-c3, ZN-c5, 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, then 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 candidates we develop, our commercial opportunities will be negatively impacted.

•Our success depends on our ability to protect our intellectual property and our proprietary platform. If we are unable to adequately protect our intellectual property and our proprietary platform, or to obtain and maintain issued patents which are sufficient to protect our product candidates, then 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 development and commercialization efforts.

•The COVID-19 pandemic has adversely impacted, and we expect will continue to adversely impact, our business, including our preclinical studies and clinical trials.

•Risks related to our ceasing to qualify as an emerging growth company after December 31, 2021.

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.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Zentalis Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share amounts and par value)


	September 30,		December 31,
	2021		2020
ASSETS
Current assets
Cash and cash equivalents	$	40,807	$	54,951
Marketable securities, available-for-sale	325,984		283,554
Accounts receivable from government grants, net	108		417
Prepaid expenses and other current assets	10,423		6,182
Restricted cash	243		—
Total current assets	377,565		345,104
Property and equipment, net	4,698		1,099
Operating lease right-of-use assets	693		2,520
Prepaid expenses and other assets	6,042		2,976
Goodwill	3,736		3,736
In-process research and development	—		8,800
Investment in Zentera Therapeutics	39,326		—
Restricted cash	3,021		1,320
Total assets	$	435,081	$	365,555
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	8,046	$	8,661
Accrued expenses	31,369		19,940
Total current liabilities	39,415		28,601
Deferred tax liability	1,670		2,480
Other long-term liabilities	—		1,097
Total liabilities	41,085		32,178
Commitments and contingencies

EQUITY


Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2021 and December 31, 2020	—		—
Common stock, $0.001 par value; 250,000,000 shares authorized; 45,198,528 and 41,040,286 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively	45		41
Additional paid-in capital	702,855		509,339
Accumulated other comprehensive income	32		36
Accumulated deficit	(309,500)		(200,834)
Total stockholders’ equity	393,432		308,582
Noncontrolling interests	564		24,795
Total equity	393,996		333,377
Total liabilities and stockholders’ equity	$	435,081	$	365,555

See notes to condensed consolidated financial statements.

Zentalis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Operating Expenses
Research and development	$	53,998	$	24,670	$	137,162	$	55,380
General and administrative	8,872		10,097		31,187		23,162
Total operating expenses	62,870		34,767		168,349		78,542
Operating loss	(62,870)		(34,767)		(168,349)		(78,542)
Other Income (Expense)
Investment and other income, net	99		120		313		368

Gain on deconsolidation of Zentera	51,582		—		51,582		—
Net loss before income taxes	(11,189)		(34,647)		(116,454)		(78,174)
Income tax expense (benefit)	(697)		18		(456)		18
Net loss	(10,492)		(34,665)		(115,998)		(78,192)
Net loss attributable to noncontrolling interests	(6,301)		(110)		(7,332)		(654)
Net loss attributable to Zentalis	$	(4,191)	$	(34,555)	$	(108,666)	$	(77,538)
Net loss per common share outstanding, basic and diluted	$	(0.09)	$	(0.91)	$	(2.59)	$	(3.21)

Common shares used in computing net loss per share, basic and diluted	44,609		37,959		41,918		24,143

See notes to condensed consolidated financial statements.

Zentalis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net loss	(10,492)		(34,665)		(115,998)		(78,192)
Other comprehensive income:
Currency translation effects	(45)		—		—		—
Unrealized gain (loss) on marketable securities	(17)		19		(4)		23
Total comprehensive loss	$	(10,554)	$	(34,646)	$	(116,002)	$	(78,169)
Comprehensive loss attributable to noncontrolling interests	(6,301)		(110)		(7,332)		(654)
Comprehensive loss attributable to Zentalis	$	(4,253)	$	(34,536)	$	(108,670)	$	(77,515)

See notes to condensed consolidated financial statements.

Zentalis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2021		2020
Operating Activities:
Consolidated net loss	(115,998)		(78,192)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	335		127
IPR&D impairment	8,800		—
Recognized tax gain on IPR&D impairment	(2,462)		—
Gain on deconsolidation of Zentera, net of tax	(49,930)		—
Share-based compensation	27,266		15,259
Loss on disposal of equipment	15		—
Amortization of premiums on marketable securities, net	712		224
Changes in operating assets and liabilities:
Accounts receivable	309		18
Prepaid expenses and other assets	1,696		(5,784)
Accounts payable and accrued liabilities	12,310		9,049
Operating lease right-of-use assets and liabilities, net	(125)		(169)
Net cash used in operating activities	(117,072)		(59,468)
Investing activities:
Purchases of marketable securities	(280,285)		(304,085)
Proceeds from maturities of marketable securities	237,139		29,000
Deconsolidation of Zentera cash	(14,320)		—
Purchases of property and equipment	(3,916)		(97)
Net cash used in investing activities	(61,382)		(275,182)
Financing Activities:
Proceeds from issuance of common stock in initial public offering, net	—		172,482
Proceeds from issuance of common stock under equity incentive plans	4,031		—
Contributions from noncontrolling interest owners, net	—		18,424
Proceeds from issuance of common stock, net	162,223		155,899
Proceeds from the issuance of Series C convertible preferred units, net	—		14,228

Net cash provided by financing activities	166,254		361,033
Net increase/(decrease) in cash, cash equivalents and restricted cash	(12,200)		26,383
Cash, cash equivalents and restricted cash at beginning of period	56,271		67,489
Cash, cash equivalents and restricted cash at end of period	$	44,071	$	93,872
Supplemental disclosure of non-cash investing and financing activities:


Costs incurred in connection with initial public offering included in accounts payable and accrued expenses	$	—	$	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:


	September 30,
	2021		2020
Cash and cash equivalents	$	40,807	$	92,552
Restricted cash	3,264		1,320
Total cash, cash equivalents and restricted cash reported in the Condensed Consolidated Statement of Cash Flows	$	44,071	$	93,872

See notes to condensed consolidated financial statements.

Zentalis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Members’/Stockholders’ Equity(Deficit) and Changes in Redeemable Convertible Preferred Units

(In thousands)


	Three Months Ended September 30, 2021

	Common			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Noncontrolling Interests		Total Equity
	Shares	Amount
Balance at June 30, 2021	41,315	$	41	$	529,019	$	94	$	(305,309)	$	23,764	$	247,609
Share-based compensation expense	—	—		7,656		—		—		—		7,656
Other comprehensive income	—	—		—		(62)		—		—		(62)
Issuance of common stock in connection with an equity offering, net of underwriting discounts, commissions and offering costs	3,565	4		162,219		—		—		—		162,223
Issuance of common stock in connection with restricted stock unit vesting	170	—		—		—		—		—		—
Deconsolidation event	—	—		—		—		—		(16,899)		(16,899)
Issuance of common stock upon exercise of options, net	137	—		3,416		—		—		—		3,416
Shares issued under employee stock purchase plan	15			545								545
Cancellation of restricted stock awards	(3)	—		—		—		—		—		—
Net loss attributable to non-controlling interest	—	—		—		—		—		(6,301)		(6,301)
Net loss attributable to Zentalis	—	—		—		—		(4,191)		—		(4,191)
Balance at September 30, 2021	45,199	$	45	$	702,855	$	32	$	(309,500)	$	564	$	393,996


	Nine Months Ended September 30, 2021

	Common			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Noncontrolling Interests		Total Equity
	Shares	Amount
Balance at December 31, 2020	41,040	$	41	$	509,339	$	36	$	(200,834)	$	24,795	$	333,377
Share-based compensation expense	—	—		27,266		—		—		—		27,266
Other comprehensive income	—	—		—		(4)		—		—		(4)
Issuance of common stock in connection with an equity offering, net of underwriting discounts, commissions and offering costs	3,565	4		162,219		—		—		—		162,223
Issuance of common stock in connection with restricted stock unit vesting	442	—		—		—		—		—		—
Deconsolidation event	—	—		—		—		—		(16,899)		(16,899)
Issuance of common stock upon exercise of options, net	141	—		3,486		—		—		—		3,486
Shares issued under employee stock purchase plan	15			545								545
Cancellation of restricted stock awards	(4)	—		—		—		—		—		—
Net loss attributable to non-controlling interest	—	—		—		—		—		(7,332)		(7,332)
Net loss attributable to Zentalis	—	—		—		—		(108,666)		—		(108,666)
Balance at September 30, 2021	45,199	$	45	$	702,855	$	32	$	(309,500)	$	564	$	393,996


	Three Months Ended September 30, 2020
	Zentalis Stockholders
	Common				Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Noncontrolling Interests		Total Equity (Deficit)
	Shares		Amount
Balance at June 30, 2020	$	35,878	$	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 costs	4,744		5		155,300		—		—		—		155,305
Cancellation of restricted stock awards	(7)		—		—		—		—		—		—
Other comprehensive income	—		—		—		19		—		—		19
Net loss attributable to non-controlling interest	—		—		(187)		—		—		77		(110)
Net loss attributable to Zentalis	—		—		—		—		(34,555)		—		(34,555)
Balance at September 30, 2020	40,615		$	41	$	501,522	$	23	$	(160,531)	$	24,778	$	365,833


	Nine Months Ended September 30, 2020
				Zentalis Members/Stockholders
	Convertible Preferred Units			Convertible Preferred Units			Class A Common Units			Class B Common Units			Common			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Noncontrolling Interests		Total Equity (Deficit)
	Units	Amount		Units	Amount		Units	Amount		Units	Amount		Shares	Amount
Balance at December 31, 2019	9,950	$	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 non-controlling 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

See notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Business

Organization

Zentalis Pharmaceuticals, Inc. (“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. 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 converted 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.

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, 2021 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 and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 25, 2021. 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 our accounts and our wholly-owned subsidiaries and variable interest entity (“VIE”) for which we are the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.

We evaluate our ownership, contractual and other interests in entities that are not wholly-owned by us to determine if these entities are VIEs, and, if so, whether we are the primary beneficiary of the VIE. In determining whether we are the primary beneficiary of a VIE and therefore required to consolidate the VIE, we apply a qualitative approach that determines whether we have both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE. We continuously assess whether we are the primary beneficiary of a VIE as changes to existing relationships or future transactions may result in the consolidation or deconsolidation, as the case may be, of such VIE.

The equity method is used to account for investments in which we have the ability to exercise significant influence, but not control, over the investee. Such investments are recorded on the balance sheet, and the share of net income or losses of equity investments is recognized on a one quarter lag in investment and other income (expense), net.

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.

Significant Accounting Policies

During the nine months ended September 30, 2021, there have been no changes to the Company’s significant accounting policies as described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 outside of the equity method accounting for investments and adoption and pending adoption of recent accounting pronouncements mentioned below.

Equity Method Accounting

We have significant influence, but not a controlling interest, in Zentera. From the deconsolidation of Zentera during July 2021 prospectively, this investment is accounted for using the equity method. Our share of earnings or losses of the investment entity are reported on the consolidated statement of operations through investment and other income, net, with a corresponding increase or decrease to the equity investment carried on the statement of financial position. This information is generally not received sufficiently timely for us to record our portion of earnings or loss in the current financial statements and therefore we report our portion of earnings or loss on a one quarter lag.

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 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, 2021

As of January 1, 2021, we did not hold equity securities, equity method investments or derivatives. The impact of this new accounting guidance in 2021 did not have a material impact to our consolidated financial statements at the time of adoption.

As of July 2021, we hold an equity method investment which is accounted for under ASC 323. The investment is recorded on the consolidated statement of financial position at fair value as of the date of deconsolidation. The Company’s share of earnings or losses of the investment entity are reported on the consolidated statement of operations through investment and other income, net with a corresponding increase or decrease to the equity investment.

3. Significant Transactions

Zentera Therapeutics

In May 2020, we became a majority common shareholder of Zentera Therapeutics, Ltd., a Shanghai-based clinical-stage biopharmaceutical company focused on developing cancer therapeutics (“Zentera”), concurrent with its Series A convertible preferred stock offering. The financial position and results of operations of Zentera have been included in our consolidated financial statements from the date of the initial investment as a result of our control of the entity. In July 2021, Zentera completed a Series B convertible preferred stock offering which diluted our investment to a position of less than majority owned. Upon review of the facts and circumstances, together with the authoritative accounting literature, we determined that consolidation of Zentera is no longer appropriate. After the July 2021 Series B convertible preferred offering in which we did not participate, our review concluded that we ceased to have a controlling financial interest in Zentera, an additional board member was added to the Zentera

board of directors and we concluded that we no longer have the power to direct the activities that most significantly affect Zentera’s economic performance nor are we the primary beneficiary of Zentera.

Beginning in July 2021, the financial position and results of operations of Zentera are no longer included in our consolidated financial statements. An equity method investment of $39.3 million was recorded on our balance sheet representing the fair value of our common stock investment using the backsolve method with consideration for a lack of marketability at the time of deconsolidation. A corresponding deferred tax liability of $1.7 million representing the tax impact of the unrealized gain on deconsolidation was recorded during the three months ended September 30, 2021. A gain of $51.6 million, measured as the difference between the fair value of our retained noncontrolling interest together with the carrying amount of the Zentera noncontrolling interest, and the carrying amount of Zentera’s assets and liabilities was recognized during the third quarter of 2021.

In May 2020, each of our subsidiaries Zeno Alpha, Inc., K-Group Alpha, Inc., Zeno Management Inc., and K-Group Beta, Inc. entered into a collaboration and royalty-bearing license agreement with Zentera, which we refer to as the “Zentera Sublicenses,” pursuant to which we collaborate with Zentera on the development and commercialization of ZN-c3, ZN-c5 and ZN-d5, respectively, in the People’s Republic of China, Macau, Hong Kong and Taiwan, which is referred to as the “Zentera Collaboration Territory.” Under each Zentera Sublicense, Zentera will lead development, and upon regulatory approval, the commercialization, of the collaboration products in the Zentera Collaboration Territory.

Under the terms of the Zentera Sublicenses, Zentera is responsible for the costs of developing the Collaboration Products in the Zentera Collaboration Territory, and we are responsible for the costs of developing the Collaboration Products outside the Zentera Collaboration Territory, provided that Zentera will reimburse us for a portion of the costs for global data management, pharmacovigilance, safety database management, and chemistry, manufacturing and controls activities with respect to each Collaboration Product. Prior to the deconsolidation of Zentera, these costs were eliminated in consolidation. For the period subsequent to deconsolidation to September 30, 2021, the amounts incurred under this arrangement totaled $2.9 million and are presented as contra-research and development expense in the consolidated statement of operations. A corresponding receivable is recorded within prepaid expenses and other current assets on the consolidated balance sheet.

4. 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.

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, the Company 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. During the third quarter of 2021, Kalyra determined that they will no longer pursue the development of Kalyra’s lead product candidate and ceased the associated clinical trial. The in-process research and development costs (“IPR&D”) recorded on Kalyra’s balance sheet exclusively relates to this candidate. Management recorded an impairment charge of $8.8 million within the research and

development expense line item on the consolidated statement of operations during the third quarter of 2021, which resulted in a reduction of the IPR&D asset from $8.8 million to zero. The impairment of IPR&D resulted in a reversal of the associated deferred tax liability of $2.4 million during the third quarter of 2021. Total assets and liabilities of Kalyra as of September 30, 2021 and December 31, 2020 are as follows (in thousands):


	September 30,		December 31,
	2021		2020
Cash and cash equivalents	$	556	$	417
Other current assets	107		82
In-process research and development	—		8,800
Goodwill	3,736		3,736

Accounts payable and accrued expenses	124		83
Deferred tax liability	—		2,463
Noncontrolling interests	$	564	$	6,705

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 condensed consolidated balance sheets.

The following is a reconciliation of equity (net assets) attributable to the noncontrolling interest (in thousands):


	September 30,
	2021
Noncontrolling interest at beginning of period	$	6,705
Net loss attributable to noncontrolling interest	(6,141)
Noncontrolling interest at end of period	$	564

5. Fair Value Measurement

Available-for-sale marketable securities consisted of the following (in thousands):


	September 30, 2021
	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
Commercial paper	239,391	23	(2)	239,412
Corporate Debt Securities	10,145	—	(3)	10,142
US Government Agencies	35,731	6	—	35,737
US Treasury	40,685	9	(1)	40,693
	325,952	38	(6)	325,984


	December 31, 2020
	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
Commercial paper	147,382	14	(8)	147,388
Corporate Debt Securities	23,576	1	(6)	23,571
US Government Agencies	81,455	32	(1)	81,486
US Treasury	31,105	4	—	31,109
	283,518	51	(15)	283,554

The Company regularly reviews the securities in an unrealized loss position and evaluates the current expected credit loss by considering 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, 2021, 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, 2021		December 31, 2020
	Estimated Fair Value
Due within one year	$	315,988	$	247,455
After one but within five years	9,996		36,099
	$	325,984	$	283,554

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):


	September 30, 2021			December 31, 2020
	Level 1	Level 2	Total estimated fair value	Level 1		Level 2		Total estimated fair value
Cash equivalents:
Money market funds	25,648	—	25,648	$	24,016	$	—	$	24,016
Corporate Debt Securities	—	—	—	—		4,999		4,999
Total cash equivalents:	25,648	—	25,648	24,016		4,999		29,015

Available-for-sale marketable securities:
Commercial paper	—	239,412	239,412	—		147,388		147,388
Corporate Debt Securities	—	10,142	10,142	—		23,571		23,571
US Government Agencies	—	35,737	35,737	—		81,486		81,486
US Treasury securities	40,693	—	40,693	31,109		—		31,109
Total available-for-sale marketable securities:	40,693	285,291	325,984	31,109		252,445		283,554

Total assets measured at fair value	66,341	285,291	351,632	$	55,125	$	257,444	$	312,569

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2021. We had no instruments that were classified within Level 3 as of September 30, 2021 or December 31, 2020.

6. Prepaid Expenses and Other Assets

Prepaid expenses and other assets consisted of the following (in thousands):


	September 30,		December 31,
	2021		2020
Prepaid insurance	$	1,661	$	1,021
Prepaid software licenses and maintenance	207		563
Foreign R&D credit refund	1,345		692
Prepaid research and development expenses	9,136		5,963
Interest receivable	288		478
Zentera receivable	2,940		—
Other prepaid expenses	888		441
Total prepaid expenses and other assets