Zentalis Pharmaceuticals Inc

1. Organization and Business

Organization

Zentalis Pharmaceuticals, Inc. (“Zentalis,” “We” or the “Company”) is a clinical-stage biopharmaceutical company discovering and developing small molecule therapeutics targeting fundamental biological pathways of cancers. The Company’s lead product candidate, azenosertib (ZN-c3), is a potentially first-in-class and best-in-class WEE1 inhibitor for advanced solid tumors and hematologic malignancies. 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.

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 June 30, 2024 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 do not include all disclosures required by U.S. GAAP. These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 27, 2024. 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. Certain reclassifications have been made to the prior period condensed consolidated balance sheet to conform to the current period presentation.

The accompanying interim unaudited condensed consolidated financial statements include our wholly-owned subsidiaries and Kalyra Pharmaceuticals, Inc. (“Kalyra”), a variable interest entity (“VIE”) for which we were the primary beneficiary until Kalyra was dissolved in January 2024 (See Note 4 - Business Combinations for additional information). All intercompany transactions and balances have been eliminated in consolidation. Following the dissolution of Kalyra, we no longer have an interest in any VIEs.

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.

Goodwill

Our goodwill, which has an indefinite useful life, represents the excess of the cost over the fair value of net assets acquired from its business combination. The determination of the value of goodwill and intangible assets arising from business combinations and asset acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired, including capitalized in-process research and development (“IPR&D”).

Goodwill is reviewed for impairment at least annually, or more frequently if an event occurs indicating the potential for impairment. During the impairment review process, we consider qualitative factors to determine whether it is more likely than not the fair value of the reporting unit is less than the carrying amount, including goodwill. If we determine that it is not more likely than not that the fair value of our reporting unit is less than the carrying amount, then no additional assessment is deemed necessary. Otherwise, we proceed to compare the estimated fair values of the reporting units with the carrying values, including goodwill. If the carrying amounts of the reporting units exceed the fair values, we record an impairment loss based on the difference. We completed our most recent annual evaluation for impairment for goodwill as of June 30, 2024 using the qualitative and quantitative assessment and determined that no impairment existed, and no charges were recorded.

Significant Accounting Policies

During the six months ended June 30, 2024 we adopted the following significant accounting policies not previously reported in the Company’s significant accounting policies as described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Investments in equity securities

We carry investments in equity securities at fair value and record the changes in fair values in the Consolidated Statement of Operations as a component of Investment and other income, net.

3. Significant Transactions

Immunome

In January 2024, Immunome, Inc. (“Immunome”) and Zentalis Pharmaceuticals, Inc. entered into an exclusive, worldwide license agreement under which Immunome licensed from Zentalis ZPC-21, a preclinical ROR1 antibody-drug conjugate (“ADC”) and stock issuance agreement (the “Stock Issuance Agreement”). The upfront consideration from Immunome amounted to $15.0 million in cash and $20.0 million in shares of Immunome common stock, with the shares valued at the trailing 30-day volume-weighted average price. On the date of execution of the transaction, the Immunome common stock was valued at $25.6 million. The performance obligation associated with this upfront payment was met as of March 31, 2024, and $40.6 million, comprised of cash and the fair value of the Immunome stock on the date of execution of the transaction, was recognized as license revenue, within the condensed consolidated statement of operations. The stock acquired was recorded at fair value on the date of acquisition, within marketable securities, available for sale on the condensed consolidated balance sheet.

Pursuant to the terms of the Stock Issuance Agreement, Zentalis agreed to hold and not sell greater than 50% of the shares until thesix-month anniversary of the closing date, subject to certain exceptions. Changes in fair value of the Immunome stock for the three and six months ended June 30, 2024 amounted to a reduction of $28.9 million and an increase of $2.3 million, respectively, recorded as a component of investment and other income, net within the condensed consolidated statement of operations. There were no disposals of the acquired stock during the three and six months ended June 30, 2024.

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. On January 10, 2024, Kalyra was dissolved and we no longer have an ownership interest in Kalyra. The dissolution and deconsolidation of Kalyra had an immaterial impact on our consolidated financial statements.

In accordance with the authoritative guidance, we concluded that, prior to its dissolution, Kalyra was a business consisting of inputs, employees, intellectual property and processes capable of producing outputs. Additionally, we concluded that Kalyra was a VIE, we were the primary beneficiary and had the power to direct the activities that most significantly affected Kalyra’s economic performance through common management and our board representation. Prior to December 21, 2017, the Company and Kalyra transacted for the delivery of research and development services and support. The financial position and results of operations of Kalyra were included in our consolidated financial statements from the date of the initial investment up until the dissolution of Kalyra on January 10, 2024.

Pursuant with authoritative guidance, we recorded the identifiable assets, liabilities and noncontrolling interests in Kalyra at their fair value upon initial consolidation. The identified goodwill was comprised of the workforce and expected synergies from combining the entities. Total assets and liabilities of Kalyra as of June 30, 2024 and December 31, 2023 arezero and immaterial, respectively. The liabilities recognized as a result of consolidating Kalyra did not represent additional claims on our general assets. Pursuant to the authoritative guidance, the equity interest in Kalyra not owned by Zentalis was 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):

5. Fair Value Measurement

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

As of June 30, 2024, twenty-two of our available-for-sale debt securities with a fair market value of $193.9 million were in a gross unrealized loss position of $0.1 million. Twenty-one have been in a gross unrealized loss position of $0.1 million for less than one year andone has been in a gross unrealized loss position of less than $0.1 million for more than one year. 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 June 30, 2024, 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):

The Company had $0.5 million in contingent consideration liabilities as of June 30, 2024 related to the agreement to terminate its Collaboration and License Agreements with Zentera. The contingent consideration balance is limited toone potential milestone payment measured at fair value. The fair value of the contingent consideration is estimated based on the monetary value of the milestone discounted for the probability of achieving the milestone and a present value factor based on the timing of when the milestone is expected to be achieved. The value for the contingent consideration balance is based on significant inputs not observable in the market which represents Level 3 measurement within the fair value hierarchy.

The following table summarizes the financial assets and liabilities that are measured on a recurring basis at fair value as of June 30, 2024 and December 31, 2023 (in thousands):

The following significant unobservable inputs were used in the valuation of the contingent consideration payable to Zentera pursuant to the Termination Agreement at June 30, 2024:

The following table reflects the activity for the Company’s contingent consideration, measured at fair value using Level 3 inputs (in thousands):

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2024. We had one instrument that was classified within Level 3 as of June 30, 2024. As of June 30, 2024 and December 31, 2023, no material fair value adjustments were required for non-financial assets and liabilities.

6. Prepaid Expenses and Other Assets

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

7. Property and Equipment, net

Property and equipment, net consisted of the following (in thousands):

Depreciation and amortization expense for the three months ended June 30, 2024 and 2023 was approximately $327 thousand and $344 thousand, respectively. Depreciation and amortization expense for the six months ended June 30, 2024 and 2023 was $651 thousand and $704 thousand, respectively.

8. Accrued Expenses

Accrued expenses consist of the following (in thousands):

9. Stockholders’ Equity

Follow-on Offering of Common Stock

On June 15, 2023, we completed a follow-on offering in which we issued and sold 11,032,656 shares of common stock at a public offering price of $22.66 per share. The total gross proceeds for the offering were approximately $250.0 million, before deducting offering expenses of $14.3 million payable by us.

Share-based Compensation

Effective April 2020, the Company’s Board of Directors adopted, and the Company’s stockholders approved, the 2020 Incentive Award Plan (the “2020 Plan”), which allows for grants to selected employees, consultants and non-employee members of the Board of Directors. We currently grant stock options and restricted stock units (“RSUs”), under the 2020 Plan. Awards may be made under the 2020 Plan covering up to the sum of (1)5,600,000 shares of common stock; plus (2) any shares forfeited from the unvested restricted shares of our common stock issued upon conversion of unvested Class B common units (up to 1,250,000 shares); plus (3) an annual increase on the first day of each fiscal year beginning with the fiscal year ending December 31, 2021 and continuing to, and including, the fiscal year ending December 31, 2030, equal to the lesser of (a)5% of the shares of common stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as determined by our Board of Directors.

At June 30, 2024,11,480,796 shares were subject to outstanding awards under the 2020 Plan and 2,811,551 shares were available for future grants of share-based awards under the 2020 Plan.

In July 2022, the Company’s Board of Directors approved the Zentalis Pharmaceuticals, Inc. 2022 Employment Inducement Incentive Award Plan (the “2022 Inducement Plan”), which is used exclusively for the grant of equity awards to new employees as an inducement material to the employees’ entering into employment with the Company. The Board of Directors has reserved 3,275,000 shares of the Company’s common stock for issuance pursuant to awards granted under the 2022 Inducement Plan.

At June 30, 2024,2,409,816 shares were subject to outstanding awards under the 2022 Inducement Plan and 840,184 shares were available for future grants of share-based awards under the 2022 Inducement Plan.

Total share-based compensation expense related to share based awards was comprised of the following (in thousands):

Share-based compensation expense by type of share-based award (in thousands):

Stock Options and Restricted Stock Units

The exercise price of stock options granted is equal to the closing price of the Company’s common stock on the date of grant. The fair value of each option award is estimated on the date of grant using the Black-Scholes model. Due to the Company’s limited operating history and a lack of company specific historical and implied volatility data, the Company estimates expected volatility based on the historical volatility of a group of similar companies that are publicly traded. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. The Company uses the “simplified method” for estimating the expected term of employee options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years). The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The Company has not issued any dividends and does not expect to issue dividends over the life of the options. As a result, the Company has estimated the dividend yield to bezero. The fair value of the stock options granted during the six months ended June 30, 2024 and June 30, 2023 was determined with the following assumptions:

Employee Stock Purchase Plan

Effective April 2020, the Company’s Board of Directors adopted, and the Company’s stockholders approved the Zentalis Pharmaceuticals, Inc. 2020 Employee Stock Purchase Plan (the “ESPP”), which was subsequently amended and restated effective March 15, 2021. The maximum aggregate number of shares of the Company’s common stock available for issuance under the ESPP at June 30, 2024 was 1,894,676. Under the terms of the ESPP, the Company’s employees may elect to have up to 20% of their compensation, up to a maximum value of $25,000 per calendar year, withheld to purchase shares of the Company’s common stock for a purchase price equal to 85% of the lower of the fair market value per share (at closing) of the Company’s common stock on (i) the first trading day of asix-month offering period, or (ii) the applicable purchase date, defined as the last trading day of thesix-month offering period. The weighted average assumptions used to estimate the fair value of stock purchase rights under the ESPP during the period ended are as follows:

Compensation Expense Summary

Total unrecognized estimated compensation cost by type of award and the weighted average requisite service period over which such expense is expected to be recognized (in thousands, unless otherwise noted):

During the six months ended June 30, 2024, we issued less thanone thousand shares of common stock in connection with the exercises of stock options. For the six months ended June 30, 2024, less thanone thousand shares of common stock issued in conjunction with certain restricted stock awards (“RSAs”), vested. Outstanding stock options and unvested RSUs totaling approximately 11.5 million shares and 2.4 million shares of our common stock, respectively, were outstanding as of June 30, 2024.

10. Commitments and Contingencies

Legal Contingencies

From time to time, we may be involved in various disputes, including lawsuits and claims arising in the ordinary course of business, including actions with respect to intellectual property, employment, and contractual matters. Any of these claims could subject us to costly legal expenses. The Company records a liability in its consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. The Company reviews these estimates each accounting period as additional information is known and adjusts the loss provision when appropriate. If a matter is both probable to result in a liability and the amounts of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss to the extent necessary to make the consolidated financial statements not misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in our consolidated financial statements. While we do generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage, or our policy limits may be inadequate to fully satisfy any damage awards or settlement. If this were to happen, the payment of any such awards could have a material adverse effect on our consolidated results of operations and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business. We are currently not a party to any legal proceedings that require a loss liability to be recorded.

Lease Termination

In December 2023, we entered into a lease for approximately 4,115 square feet of office space in New York, New York. The lease commenced in December 2023 and had a lease term through August 2027. In June 2024, we entered into an agreement to terminate this lease in exchange for consideration of $0.5 million.

Leases

Our commitments include payments related to operating leases. Approximate annual future minimum operating lease payments as of June 30, 2024 are as follows (in thousands):

The weighted-average remaining lease term of our operating leases is approximately 8.3 years.

On March 6, 2023, we entered into a sublease agreement pursuant to which we sublet the office space located at 1359 Broadway, Suites 1710 and 1800 in New York, New York to a subtenant. For the six months ended June 30, 2024, we recorded lease income of $0.7 million relating to our New York sublease.

11. Net Income (Loss) Per Common Share

Basic and diluted net income (loss) per common share were calculated as follows (in thousands except per share amounts):

Our potential and dilutive securities, which include outstanding stock options, unvested RSAs and unvested RSUs have been excluded from the computation of diluted net loss per common share as the effect would be anti-dilutive.

The following common stock equivalents have been excluded from the calculations of diluted net income (loss) per common share because their inclusion would be antidilutive (in thousands).