Zentalis(ZNTL) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents the unaudited condensed consolidated financial statements and detailed notes for the periods ended June 30, 2021 and December 31, 2020 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | ASSETS (in thousands) | June 30, 2021 | December 31, 2020 | | :---------------------- | :------------ | :---------------- | | Cash and cash equivalents | $49,170 | $54,951 | | Marketable securities, available-for-sale | $201,730 | $283,554 | | Total current assets | $259,449 | $345,104 | | Total assets | $283,962 | $365,555 | | Total current liabilities | $33,577 | $28,601 | | Total liabilities | $36,353 | $32,178 | | Total stockholders' equity | $223,845 | $308,582 | | Total equity | $247,609 | $333,377 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | Operating Expenses (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Research and development | $44,770 | $17,452 | $83,164 | $30,710 | | General and administrative | $10,362 | $9,924 | $22,315 | $13,065 | | Total operating expenses | $55,132 | $27,376 | $105,479 | $43,775 | | Operating loss | $(55,132) | $(27,376) | $(105,479) | $(43,775) | | Net loss attributable to Zentalis | $(54,574) | $(26,857) | $(104,475) | $(42,983) | | Net loss per common share, basic and diluted | $(1.34) | $(0.78) | $(2.58) | $(2.53) | Condensed Consolidated Statements of Comprehensive Loss Condensed Consolidated Statements of Comprehensive Loss (in thousands) | (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(55,062) | $(27,292) | $(105,506) | $(43,527) | | Total comprehensive loss | $(55,018) | $(27,288) | $(105,448) | $(43,527) | | Comprehensive loss attributable to Zentalis | $(54,530) | $(26,853) | $(104,417) | $(42,979) | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activities (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :---------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(83,582) | $(38,900) | | Net cash provided by/used in investing activities | $80,061 | $(137,290) | | Net cash used in/provided by financing activities | $(316) | $205,130 | | Net increase/(decrease) in cash, cash equivalents and restricted cash | $(3,837) | $28,930 | | Cash, cash equivalents and restricted cash at end of period | $52,434 | $96,420 | Condensed Consolidated Statement of Members' Equity (Deficit) and Changes in Redeemable Convertible Preferred Stock Changes in Total Equity (in thousands) | Equity Component (in thousands) | Balance at Dec 31, 2020 | Share-based Compensation Expense | Other Comprehensive Income | Net Loss Attributable to Non-controlling Interest | Net Loss Attributable to Zentalis | Balance at June 30, 2021 | | :------------------------------ | :---------------------- | :------------------------------- | :------------------------- | :---------------------------------------------- | :-------------------------------- | :----------------------- | | Total Equity | $333,377 | $19,610 | $58 | $(1,031) | $(104,475) | $247,609 | Notes to Condensed Consolidated Financial Statements - The Company is a clinical-stage pharmaceutical company focused on discovering and developing novel small molecule therapeutics targeting cancer pathways, operating as a single segment[51] - The Company converted from a Delaware limited liability company to a Delaware corporation on April 2, 2020, prior to its IPO, and changed its name to Zentalis Pharmaceuticals, Inc[53] - The Company completed its IPO on April 7, 2020, issuing 10,557,000 shares at $18.00 per share, generating $190.0 million in gross proceeds[54] - Management determined there is no substantial doubt about the Company's ability to continue as a going concern within one year from the financial statement issuance date[55] - The Company adopted ASU 2020-01 on January 1, 2021, which clarifies accounting standards for equity securities, equity method investments, and certain derivatives, with no material impact[61] - The Company acquired a 25% equity interest in Kalyra Pharmaceuticals, Inc for $4.5 million in December 2017, consolidating Kalyra as a variable interest entity (VIE) for which Zentalis is the primary beneficiary[62][63] Available-for-sale marketable securities (in thousands) | Security Type (in thousands) | June 30, 2021 Estimated Fair Value | December 31, 2020 Estimated Fair Value | | :--------------------------- | :--------------------------------- | :--------------------------------- | | Commercial paper | $106,507 | $147,388 | | Corporate Debt Securities | $11,048 | $23,571 | | US Government Agencies | $53,334 | $81,486 | | US Treasury securities | $30,841 | $31,109 | | Total | $201,730 | $283,554 | - Contractual maturities of available-for-sale debt securities due within one year were $201.7 million as of June 30, 2021, down from $247.5 million at December 31, 2020[68] Prepaid Expenses and Other Assets (in thousands) | Item (in thousands) | June 30, 2021 | December 31, 2020 | | :------------------ | :------------ | :---------------- | | Prepaid insurance | $2,338 | $1,020 | | Prepaid R&D expenses | $8,100 | $5,960 | | Total current prepaid expenses and other assets | $8,301 | $6,180 | Property and Equipment, net (in thousands) | Item (in thousands) | June 30, 2021 | December 31, 2020 | | :------------------ | :------------ | :---------------- | | Computer and Office Equipment | $554 | $520 | | Lab Equipment | $1,714 | $420 | | Property and equipment, net | $2,251 | $1,090 | - Depreciation and amortization expense increased significantly, from $38 thousand to $119 thousand for the three months ended June 30, 2020 and 2021, respectively, and from $76 thousand to $198 thousand for the six months ended June 30, 2020 and 2021, respectively[73] Accrued Expenses (in thousands) | Item (in thousands) | June 30, 2021 | December 31, 2020 | | :------------------ | :------------ | :---------------- | | Accrued R&D expenses | $16,640 | $11,940 | | Accrued employee expenses | $6,389 | $5,640 | | Total accrued expenses | $25,304 | $19,940 | - All convertible preferred units (Series A, B, and C) were converted to common stock in conjunction with the IPO on April 2, 2020, and no preferred units were outstanding as of June 30, 2021, and December 31, 2020[80][83] - The Company completed a follow-on offering on July 1, 2021, issuing 3,565,000 shares at $48.50 per share, generating approximately $172.9 million in gross proceeds[130] - Zentera, the Company's China joint venture, raised approximately $75 million in gross proceeds from a Series B Preference Shares Purchase Agreement in July 2021; Zentalis holds approximately 40% equity interest in Zentera[131] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on financial condition, operational results, pipeline updates, liquidity, and strategic collaborations Overview - Zentalis is a clinical-stage biopharmaceutical company focused on discovering and developing small molecule therapeutics for cancer using its 'Integrated Discovery Engine'[134] - Lead product candidates include ZN-c3 (WEE1 inhibitor) in Phase 2 for uterine serous carcinoma and Phase 1/2 for advanced solid tumors, and ZN-c5 (oral SERD) in Phase 1/2 for ER+/HER2- advanced or metastatic breast cancer[135] - ZN-c3 showed confirmed Partial Responses (PRs) in 5 patients and an Objective Response Rate (ORR) of 43% in its Phase 1 monotherapy trial as of May 15, 2021, with a lower rate of severe hematological adverse events (2.2%)[137][138] - The FDA concurred with ZN-c3's potential for an accelerated approval pathway for recurrent or persistent USC, with a Phase 2 monotherapy trial initiated[139] - ZN-c5 monotherapy showed a Clinical Benefit Rate (CBR) of 54% and ORR of 13% at the 300 mg QD dose as of May 11, 2021, with low treatment-emergent adverse events and no observed bradycardia or visual disturbances[145] - ZN-d5 (BCL-2 inhibitor) Phase 1 trial has enrolled 14 patients for Non-Hodgkin's Lymphoma, with no dose-limiting toxicities, and plans to enroll acute myeloid leukemia patients in Q3 2021[149] - ZN-e4 (EGFR inhibitor) Phase 1/2 trial has enrolled 26 patients for advanced non-small cell lung cancer, showing clinical activity at doses >80 mg QD and good tolerability as of March 25, 2021[150] Liquidity Overview - The Company has incurred significant net losses since inception, with $105.5 million for the six months ended June 30, 2021, and an accumulated deficit of $305.3 million as of June 30, 2021[153] - Cash, cash equivalents, and marketable securities totaled $250.9 million as of June 30, 2021[152] - Existing capital, combined with July 2021 follow-on offering proceeds, is expected to fund operations into Q3 2023[152] Corporate Conversion - Prior to its IPO, Zentalis Pharmaceuticals, LLC converted into Zentalis Pharmaceuticals, Inc on April 2, 2020, with all outstanding units converting into 25,288,854 shares of common stock[157][158] Impact of COVID-19 Pandemic - The COVID-19 pandemic has caused disruptions, including delays in trial site initiation, enrollment, and supply chain activities, impacting preclinical studies and clinical trials[159] - The Company expects continued adverse impacts on its business, operating results, clinical development timelines, and financial condition due to the evolving nature of the pandemic[159] License Agreements and Strategic Collaborations Agreements - Recurium IP Holdings, LLC: Zentalis has an exclusive worldwide license for certain IP rights, with obligations for milestone payments (up to $44.5 million), royalties, and sublicensing payments[161][162] - Mayo Foundation: An option agreement for a nonexclusive worldwide license expired on February 11, 2021, with Zentalis having granted 15,435 shares of common stock[163] - SciClone Pharmaceuticals: Zentalis granted an exclusive license for its EGFR inhibitor (ZN-e4) in the SciClone Territory for a $1.0 million upfront payment and $4.0 million in milestone payments, plus royalties[164][165] - Pfizer: Collaboration to evaluate ZN-c5 with palbociclib, with Zentalis responsible for conduct/cost and Pfizer supplying palbociclib at no cost[166] - Eli Lilly and Company: Collaboration to evaluate ZN-c5 with abemaciclib, with Zentalis responsible for conduct/cost and Lilly supplying abemaciclib at no cost[167] - GlaxoSmithKline: Collaboration to evaluate ZN-c3 with niraparib, with Zentalis responsible for conduct/cost and GSK supplying niraparib at no cost[170][171] - Zentera Therapeutics (China Joint Venture): Zentalis collaborates on ZN-c3, ZN-c5, and ZN-d5 development in China and is eligible for future milestones (up to $4.45 million per product) and royalties[175][177] Components of Our Results of Operations - The Company has not generated product sales revenue to date and expects future revenue primarily from collaboration agreements[181] - Research and development expenses are expensed as incurred and include salaries, third-party costs (CROs, CMOs), consultant fees, lab supplies, license payments, and allocated facility costs[182][184] Research and Development Expenses by Product Candidate (in thousands) | Product Candidate (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | ZN-c3 | $8,661 | $2,520 | $16,465 | $4,161 | | ZN-c5 | $10,101 | $6,180 | $17,281 | $10,873 | | ZN-d5 | $3,867 | $1,412 | $8,039 | $2,679 | | ZN-e4 | $394 | $274 | $711 | $1,027 | | Unallocated R&D expenses | $21,747 | $7,066 | $40,668 | $11,970 | | Total R&D expenses | $44,770 | $17,452 | $83,164 | $30,710 | - General and administrative expenses include salaries, legal fees, professional fees, insurance, and facility-related costs, expected to increase with public company operations and growth[189][190] - The Company has generated cumulative net operating losses since inception, with no net tax benefit recorded due to uncertainty of utilization[192] Results of Operations Comparison of Three Months Ended June 30, 2021 vs. 2020 (in thousands) | Item (in thousands) | June 30, 2021 | June 30, 2020 | Increase (Decrease) | | :------------------ | :------------ | :------------ | :------------------ | | R&D expenses | $44,770 | $17,452 | $27,318 | | G&A expenses | $10,362 | $9,924 | $438 | | Total operating expenses | $55,132 | $27,376 | $27,756 | | Net loss attributable to Zentalis | $(54,574) | $(26,857) | $(27,717) | - Research and development expenses increased by $27.3 million (YoY) for the three months ended June 30, 2021, driven by advancing clinical trials for ZN-c3 and ZN-c5, preclinical studies, manufacturing, and employee costs[196] - General and administrative expenses increased by $0.5 million (YoY) for the three months ended June 30, 2021, primarily due to higher employee-related and supply costs[197] Comparison of Six Months Ended June 30, 2021 vs. 2020 (in thousands) | Item (in thousands) | June 30, 2021 | June 30, 2020 | Increase (Decrease) | | :------------------ | :------------ | :------------ | :------------------ | | R&D expenses | $83,164 | $30,710 | $52,454 | | G&A expenses | $22,315 | $13,065 | $9,250 | | Total operating expenses | $105,479 | $43,775 | $61,704 | | Net loss attributable to Zentalis | $(104,475) | $(42,983) | $(61,492) | - Research and development expenses increased by $52.5 million (YoY) for the six months ended June 30, 2021, primarily due to advancing clinical trials, preclinical studies, manufacturing, and employee costs[205] - General and administrative expenses increased by $9.2 million (YoY) for the six months ended June 30, 2021, mainly due to a $10.1 million increase in employee-related costs, including $6.5 million in non-cash stock-based compensation[206] Liquidity and Capital Resources - The Company has financed operations primarily through equity sales, raising $518.1 million in gross proceeds from preferred units, its IPO, and a follow-on offering[214] - As of June 30, 2021, cash, cash equivalents, and marketable securities totaled $250.9 million, with an accumulated deficit of $305.3 million[214] - The Company believes existing capital, plus July 2021 follow-on offering proceeds, will fund operations into Q3 2023, but substantial additional capital will be needed for continued operations[211][227] - In May 2021, the Company entered into an 'at-the-market' (ATM) sales agreement to sell up to $200.0 million in common stock, though no securities have been issued under this program yet[215] - A follow-on offering completed in July 2021 generated approximately $172.9 million in gross proceeds from the sale of 3.6 million shares of common stock[216] Cash Flow Summary (in thousands) | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(83,582) | $(38,900) | | Net cash provided by/used in investing activities | $80,061 | $(137,290) | | Net cash used in/provided by financing activities | $(316) | $205,130 | - Net cash used in operating activities increased to $83.6 million for the six months ended June 30, 2021, from $38.9 million in the prior year, primarily due to increased net loss from R&D and G&A expenses[219][220] - Net cash provided by investing activities was $80.0 million for the six months ended June 30, 2021, a significant change from $137.3 million used in the prior year, driven by proceeds from marketable securities maturities[221][222] - Net cash used in financing activities was $0.3 million for the six months ended June 30, 2021, compared to $205.1 million provided in the prior year, which included IPO proceeds[223][224] Off-Balance Sheet Arrangements - The Company has not entered into any off-balance sheet arrangements[233] Critical Accounting Policies and Use of Estimates - There have been no significant changes to the Company's critical accounting policies from those reported in its 2020 Form 10-K[234] Emerging Growth Company Status - The Company is an 'emerging growth company' under the JOBS Act, allowing it to take advantage of reduced reporting requirements and an extended transition period for new accounting standards[235][237] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there are no quantitative and qualitative disclosures about market risk applicable to the company - The Company has no applicable quantitative and qualitative disclosures about market risk[240] Item 4. Controls and Procedures This section details the effectiveness of the company's disclosure controls and procedures and reports on changes in internal control - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2021[242] - There were no changes in internal control over financial reporting during the quarter ended June 30, 2021, that materially affected or are reasonably likely to materially affect internal control[243] PART II. OTHER INFORMATION Item 1. Legal Proceedings Confirms the company is not currently involved in any material legal proceedings - The Company is not subject to any material legal proceedings[246] Item 1A. Risk Factors Outlines risks and uncertainties affecting the company's business, financial condition, and operational results - Risks related to financial position include a limited operating history, significant net losses since inception, and the need for substantial additional capital to finance operations[248][251][257] - Risks related to product development include substantial dependence on lead product candidates (ZN-c3, ZN-c5), the unpredictability of clinical trial outcomes, and potential for delays in patient enrollment[260][271][301] - Regulatory and legal compliance risks involve lengthy and unpredictable approval processes, potential for adverse events, challenges with companion diagnostics, and the impact of changes in healthcare laws[273][331][348][362] - Operational risks include the adverse impact of the COVID-19 pandemic, dependence on retaining skilled personnel, challenges in establishing sales capabilities, and difficulties in managing growth[386][389][391][396] - Intellectual property risks involve the ability to obtain and maintain patent protection, reliance on third-party licensors, potential for infringement claims, and the impact of patent reform legislation[416][421][440][453] - Dependence on third parties for preclinical studies, clinical trials, and manufacturing poses risks of delays, insufficient supply, and non-compliance with regulatory requirements[474][481][485] - Risks related to common stock ownership include stock price volatility, significant influence by major stockholders, potential dilution from future capital raises, and anti-takeover provisions[493][498][502][507] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports on the use of proceeds from the company's initial public offering (IPO) - The Company completed its IPO on April 7, 2020, raising approximately $172.4 million in net proceeds from the sale of 10,557,000 shares at $18.00 per share[527][528] - As of June 30, 2021, the net proceeds from the IPO have been invested in investment-grade, interest-bearing instruments, with no material change in the expected use of funds[528] Item 3. Defaults Upon Senior Securities Indicates that there are no defaults upon senior securities - Not applicable, as there are no defaults upon senior securities[529] Item 4. Mine Safety Disclosures States that there are no mine safety disclosures applicable to the company - Not applicable, as there are no mine safety disclosures[530] Item 5. Other Information Indicates that there is no other information to report - No other information to report[532] Item 6. Exhibits Lists all exhibits filed as part of the Form 10-Q - Exhibits include the Plan and Certificate of Conversion, Certificate of Incorporation, Bylaws, CEO/CFO certifications, and Inline XBRL documents[533] Signatures Contains the required signatures from the company's authorized officers - The report is signed by Anthony Y Sun, M.D., Chief Executive Officer, and Melissa B Epperly, Chief Financial Officer, on August 12, 2021[539]