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, 2022
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: 001-38205
____________________
(Exact Name of Registrant as Specified in its Charter)
____________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| 314 Main Street 4th Floor, Suite 100 Cambridge, MA, USA | 02142 | ||||
| (Address of principal executive offices) | (Zip Code) | ||||
+86 21 6163 2588
(Registrant’s Telephone Number, Including Area Code)
____________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| The Stock Exchange of Hong Kong Limited | ||||||||||||||
*Included in connection with the registration of the American Depositary Shares with the Securities and Exchange Commission. The ordinary shares are not registered or listed for trading in the United States but are listed for trading on The Stock Exchange of Hong Kong Limited.
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 x No o
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 x No o
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.
x | Accelerated filer | o | ||||||||||||
| Non-accelerated filer | o | 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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 3, 2022, 979,087,430 ordinary shares of the registrant, par value $0.000006 per share, were outstanding, of which 743,576,320 ordinary shares were held in the form of American Depositary Shares.
Zai Lab Limited
Quarterly Report on Form 10-Q
| Page | ||||||||
SPECIAL NOTES REGARDING THE COMPANY
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements that involve risks and uncertainties. These forward-looking statements include, without limitation, statements containing words such as “aim,” “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “plan,” “possible,” “potentially,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these terms or similar expressions. Such statements constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information, that are not statements of historical facts, nor are they guarantees or assurances of future performance. These forward-looking statements relate to our future plans, objectives, expectations, intentions, and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to inherent uncertainties, risks, and changes in circumstances that may differ materially from those contemplated by the forward-looking statements because they relate to events and depend on circumstances that may or may not occur in the future. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including but not limited to the following:
• The effects of the COVID-19 pandemic, including any government actions and lockdown measures taken in response, particularly in mainland China where our operations and product markets are primarily located;
• Changes in United States and China trade policies and relations, as well as relations with other countries, and/or changes in regulations and/or sanctions that may adversely impact our business, operating results, ability to raise capital, and market price of our ordinary shares and/or our ADSs;
• Actions the Chinese government may take to intervene in or influence our operations, which could result in a material change in our operations and significantly and adversely impact the value of our ADSs and ordinary shares, including potentially making those ADSs or ordinary shares worthless;
• Economic, political, and social conditions in mainland China, as well as governmental policies, that could affect the business environment and financial markets in mainland China and our ability to operate our business, liquidity, and access to capital;
• Uncertainties in the Chinese legal system that could materially and adversely affect us; including the Data Security Law, the Cyber Security Law, the Cybersecurity Review Measures, the Personal Information Protection Law, the Regulation on the Administration of Human Genetic Resources, the Biosecurity Law, the Security Assessment Measures, and any other future laws and regulations, which may entail significant expenses for compliance or otherwise materially affect our business;
• Any approval, filing, or procedural requirements by the China Securities Regulatory Commission (“CSRC”) or other Chinese regulatory authorities in connection with issuing securities to foreign investors under Chinese law, which could affect our ability to raise capital;
• Any violation or liability under the U.S. Foreign Corrupt Practices Act or Chinese anti-corruption laws, which could have a material adverse effect on our business or reputation;
• Restrictions on currency exchange that could limit our ability to receive and use financing in foreign currencies effectively;
• Any limitation on the ability of our Chinese subsidiaries to make payments to us that could have a material and adverse effect on our ability to conduct our business or fund our cash and financing requirements;
• Chinese requirements on the ability of residents in mainland China to establish offshore special purpose companies by residents in mainland China, which may subject our China resident beneficial owners or our wholly foreign-owned subsidiaries in mainland China to liability or penalties, limit our ability to inject capital into these subsidiaries, limit these subsidiaries’ ability to increase their registered capital or distribute profits to us, or otherwise adversely affect us;
• Chinese regulations regarding acquisitions of mainland China based companies by foreign investors which could make it more difficult for us to pursue growth through acquisitions in mainland China;
• Any issues that our Chinese manufacturing facilities have with operating in conformity with established GMPs and international best practices, and passing FDA, National Medical Products Administration (“NMPA”), and EMA inspections, which could result in a longer and costlier GMP inspection and approval process by the FDA, NMPA, or EMA for our Chinese manufacturing processes and third-party contract manufacturers;
• Expiration of, or changes to, financial incentives or discretionary policies granted by local governments that could have an adverse effect on our results of operations;
• Any difficulty for overseas regulators to conduct investigations or collect evidence within mainland China that could adversely affect our business, compliance with regulatory requirements, ability to raise capital, and share price of our ordinary shares and/or ADSs;
• Any unfavorable tax consequences to us and our non-Chinese shareholders or ADS holders if we were to be classified as a Chinese resident enterprise for Chinese income tax purposes;
• Any failure to comply with applicable Chinese, U.S., and Hong Kong regulations that could lead to government enforcement actions, subject us to fines and other legal or administrative sanctions, or otherwise adversely affect our business, financial condition, and results of operations;
• Any review by the Committee on Foreign Investment in the United States in our investments, which may delay or block a transaction from closing;
• Failure to renew our current leases or locate desirable alternatives for our leased properties which could adversely affect our business;
• Our ability to generate revenues from our four approved products;
• Any inability of third parties on whom we rely to conduct our pre-clinical and clinical trials to successfully carry out their contractual duties or meet expected deadlines that could adversely affect our ability to obtain regulatory approval for, or commercialize, our products or product candidates; and
• Any inability to obtain or maintain sufficient patent protection for our products and product candidates that could adversely affect our business by allowing third parties to compete directly against us.
These factors should not be construed as exhaustive and should be read with the other cautionary statements and information in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (“SEC”) on March 1, 2022 (the “2021 Annual Report”), our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 filed with the SEC on May 10, 2022 (the “Q1 2022 Form 10-Q”), our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 filed with the SEC on August 9, 2022 (the “Q2 2022 Form 10-Q”), and this Quarterly Report on Form 10-Q. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available. These statements, like all statements in this Quarterly Report on Form 10-Q, speak only as of their date. We anticipate that subsequent events and developments will cause our expectations and assumptions to change, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Usage of Terms
Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Greater China” refer to mainland China, Hong Kong Special Administrative Region (“Hong Kong”), Macau Special Administrative Region (“Macau”), and Taiwan, collectively; references to “Zai Lab,” the “Company,” “we,” “us,” and “our” refer to Zai Lab Limited, a holding company and its subsidiaries, on a consolidated basis; and references to “Zai Lab Limited” refer to Zai Lab Limited, a holding company. Zai Lab Limited is the entity in which investors are purchasing their interest.
Our operating subsidiaries consist of Zai Lab (Hong Kong) Limited, domiciled in Hong Kong; Zai Auto Immune (Hong Kong) Limited, domiciled in Hong Kong; Zai Anti Infectives (Hong Kong) Limited, domiciled in Hong Kong; Zai Lab (Shanghai) Co., Ltd., domiciled in mainland China; Zai Lab International Trading (Shanghai) Co., Ltd., domiciled in mainland China; Zai Lab (Suzhou) Co., Ltd., domiciled in mainland China; Zai Biopharmaceutical (Suzhou) Co., Ltd., domiciled in mainland China; Zai Lab Trading (Suzhou) Co., Ltd., domiciled in mainland China; Zai Lab (Taiwan) Limited, domiciled in Taiwan; Zai Lab (AUST) Pty. Ltd., domiciled in Australia; and Zai Lab (US) LLC, domiciled in the United States. As of the date of this Quarterly Report on Form 10-Q, Zai Anti Infectives (Hong Kong) Limited has non-substantial business operations.
Disclosures Relating to Our Chinese Operations
Zai Lab Limited is not a Chinese operating company, but a holding company incorporated in the Cayman Islands.
Zai Lab Limited is not a Chinese operating company, but a holding company incorporated in the Cayman Islands. As a holding company, we conduct a substantial portion of our operations through wholly owned subsidiaries based in mainland China. Investors will not hold direct investments in our Chinese operating companies. In July 2021, the Chinese government provided new guidance on Chinese companies raising capital outside of mainland China, including through arrangements called variable interest entities (“VIEs”). Currently, our corporate structure contains no VIEs, and the life sciences industry in which we operate is not subject to foreign ownership limitations in mainland China. However, there are uncertainties with respect to the Chinese legal system, and there may be changes in laws, regulations, and policies, including how those laws, regulations, and policies will be interpreted or implemented. If, in the future, the Chinese
government determines that our corporate structure does not comply with Chinese regulations, or if Chinese regulations change or are interpreted differently, the value of our American Depositary Shares (“ADSs”) and/or ordinary shares may decline or become worthless.
There are significant legal and operational risks associated with conducting a substantial portion of our operations in mainland China, including that changes in the legal, political, and economic policies of the Chinese government, the relations between mainland China and the United States, or Chinese or U.S. regulations may materially and adversely affect our business, financial condition, results of operations, and the market price of our ADSs and/or ordinary shares.
There are significant legal and operational risks associated with conducting a substantial portion of our operations in mainland China, including that changes in the legal, political, and economic policies of the Chinese government, the relations between mainland China and the United States, or Chinese or U.S. regulations may materially and adversely affect our business, financial condition, results of operations, and the market price of our ADSs and/or ordinary shares. Any such changes could significantly limit or completely hinder our ability to offer or continue to offer our ADSs and/or ordinary shares to investors and could cause the value of our ADSs or ordinary shares to significantly decline or become worthless. For example, geopolitical events, such as developments with respect to Taiwan, continue to cause heightened tensions between the United States and China, which could have potential adverse effects on our business, results of operations, ability to raise capital or raise capital on favorable terms, or the market price of our ordinary shares and/or ADSs. In addition, our obligations to comply with the Personal Information Protection Law, the Data Security Law, the Cyber Security Law, the Cybersecurity Review Measures (which became effective on February 15, 2022), the Measures on Security Assessment of Cross-Border Data Transfer (which became effective on September 1, 2022) (the “Security Assessment Measures”), regulations and guidelines relating to the multi-level protection scheme, and any other future laws and regulations may require us to incur significant expenses and could materially affect our ability to conduct our business, accept foreign investments, or continue to be listed on a U.S. or foreign stock exchange.
For more information on these risks and other risks relating to our ADSs and ordinary shares, see “Item 1A. Risk Factors” in our 2021 Annual Report and in this Quarterly Report on Form 10-Q.
We are required to obtain certain permissions from Chinese authorities to operate in mainland China, issue securities to foreign investors, and transfer certain scientific data.
We are required to obtain certain permissions from Chinese authorities to operate in mainland China, issue securities to foreign investors, and transfer certain scientific data. The Chinese government has exercised, and may continue to exercise, substantial influence or control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in mainland China may be undermined if our Chinese subsidiaries are not able to obtain or maintain approvals to operate in mainland China. The central or local governments could impose new, stricter regulations or interpretations of existing regulations that could require additional expenditures and efforts on our part to comply with such regulations or interpretations.
As of the date of this Quarterly Report on Form 10-Q, we are not currently required to obtain approval or prior permission from the CSRC or any other Chinese regulatory authority under the Chinese laws and regulations currently in effect to issue securities to foreign investors. However, in January 2022, the CSRC released for public comment draft rules titled Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) and Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (together, the “Draft Rules”). If the Draft Rules are adopted in their current form, we would likely be required to submit filings to the CSRC in connection with the future issuance of our equity securities to foreign investors. As there are uncertainties with respect to the Chinese legal system and changes in laws, regulations, and policies, including how those laws, regulations, and policies will be interpreted or implemented, we could be subject to additional requirements, approvals, or permissions in the future. We are required to obtain certain approvals from Chinese authorities in order to operate our Chinese subsidiaries. We are also required to obtain certain approvals from Chinese authorities before transferring certain scientific data abroad or to foreign parties or entities established or actually controlled by them.
We will be required to obtain approval from the Cyberspace Administration of China (“CAC”) when the transfers out of mainland China of certain data that is determined to be important data or personal data falls into any of the scenarios requiring a security assessment by the CAC specified in the Security Assessment Measures. The cross-border transfer out of mainland China of data requiring such a security assessment will not be allowed if the CAC does not approve the security assessment filing. In addition, the disclosure, sharing, or exporting to a foreign entity by a Chinese-owned entity of any data derived from human organs, tissues, or cells of Chinese individuals that contain human genetic materials requires a project-level approval by or a separate notification to the Human Genetic Resources Administration of China (“HGRAC”). The HGRAC also requires submission of a copy of the data to be exported. If our Chinese subsidiaries intend
to receive certain clinical or personal data from Chinese-owned entities or transfer certain clinical or personal data out of mainland China, they will need to first evaluate whether a security assessment by the CAC or a clearance from the HGRAC will be triggered by such data transfer, pass the security assessment, make the necessary notification filings, or obtain the necessary project-level approvals for such data transfer.
If our Chinese subsidiaries do not receive or maintain approvals or inadvertently conclude that approvals needed for their business are not required, or if there are changes in applicable laws (including regulations) or interpretations of laws and our Chinese subsidiaries are required but unable to obtain approvals in the future, then such changes or need for approvals (if not obtained) could adversely affect the operations of our Chinese subsidiaries, including limiting or prohibiting the ability of our Chinese subsidiaries to operate, and the value of our ADSs and/or ordinary shares could significantly decline or become worthless.
For more information on these required permissions, see “Item 1A. Risk Factors” in our 2021 Annual Report.
To operate our general business activities currently conducted in mainland China, each of our Chinese subsidiaries is required to obtain a business license from the local counterpart of the State Administration for Market Regulation (“SAMR”).
To operate our general business activities currently conducted in mainland China, each of our Chinese subsidiaries is required to obtain a business license from the local counterpart of the SAMR. Each of our Chinese subsidiaries has obtained a valid business license from the local counterpart of the SAMR, and no application for any such license has been denied. Our Chinese subsidiaries are also required to obtain certain licenses and permits, including but not limited to the following material licenses and permits: Pharmaceutical Manufacturing Permits, Pharmaceutical Distribution Permits, and Medical Device Distribution Permits to manufacture and/or distribute drugs and/or applicable medical devices. No application for any such material license or permit has been denied.
Because our prior auditor, which filed an audit report with our last annual report, was located in mainland China, a jurisdiction where the U.S. Public Company Accounting Oversight Board (“PCAOB”) is unable to inspect or investigate completely because of restrictions imposed by Chinese authorities, SEC staff conclusively identified us under the Holding Foreign Companies Accountable Act (“HFCAA”) in March 2022. Because the Company subsequently engaged KPMG LLP (“KPMG”), a U.S. auditor that is subject to inspection and review by the PCAOB, to be our independent registered public accounting firm for the fiscal year ending December 31, 2022 and because the Company has a principal executive office, significant operations, and a majority of our Board members and executives in the United States, we believe we have mitigated our risk of delisting pursuant to the HFCAA. However, if we were to fail to meet the audit requirements of the HFCAA for three consecutive years (or two years, if bills passed by the U.S. Senate or House of Representatives are enacted), we may be prohibited from listing our securities on a national securities exchange or over-the-counter market in the United States and delisted from the Nasdaq Global Market (“Nasdaq”). The foregoing could adversely affect the market price of our ordinary shares and/or ADSs and our ability to raise capital effectively.
In recent years, the U.S. Congress and regulatory authorities have expressed concerns about challenges in their oversight of financial statement audits of U.S.-listed companies with significant operations in mainland China, and in December 2020, the United States enacted the HFCAA. The HFCAA requires the SEC to identify issuers that have filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction (a “Commission-Identified Issuer”). The PCAOB has issued a Determination Report, which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong because of positions taken by Chinese authorities in those jurisdictions, and in March 2022, SEC staff conclusively identified the Company as a Commission-Identified Issuer because our prior auditor, which filed an audit report with our 2021 Annual Report, was located in mainland China.
Under the HFCAA, if the SEC conclusively identifies an issuer as a Commission-Identified Issuer for three consecutive years, the SEC is required to prohibit the trading of the issuer’s securities on a national securities exchange or through any other method that is within the jurisdiction of the SEC to regulate, including over-the-counter markets in the United States. If either the Accelerating Holding Foreign Companies Accountable Act passed by the U.S. Senate in June 2021 or the America Creating Opportunities for Manufacturing Pre-Eminence in Technology and Economic Strength (COMPETES) Act of 2022 passed by the U.S. House of Representatives in February 2022 are enacted, the number of non-inspection years would be reduced from three years to two years. It is unclear if or when either of these bills will be signed into law.
In May 2022 the Company engaged KPMG, an auditor located in the United States that is inspected by the PCAOB, as our independent registered public accounting firm for the fiscal year ending December 31, 2022. In addition, we have a
principal executive office, significant operations, and a majority of our Board members and executive officers in the United States. As a result, we believe that we have mitigated our risk of delisting pursuant to the HFCAA. However, if we were to fail to meet the audit requirements of the HFCAA for three consecutive years (or two years if the number of non-inspection years is reduced by legislation), our securities may be prohibited from trading on the Nasdaq or other U.S. stock exchanges, and this ultimately could result in our ADSs being delisted. Delisting of our ADSs would force holders of our ADSs to sell their ADSs or convert them into our ordinary shares. The foregoing could adversely affect the market price of our ordinary shares and/or ADSs and our ability to raise capital effectively. The market price of our ordinary shares and/or ADSs also could be adversely affected as a result of anticipated negative impacts of such legislative or executive actions upon, as well as negative investor sentiment toward, companies with significant operations in mainland China and Hong Kong that are listed in the United States, regardless of whether such actions are implemented and regardless of our actual operating performance.
On August 26, 2022, the PCAOB signed a Statement of Protocol with the CSRC and the Ministry of Finance of the PRC governing inspections and investigations of audit firms based in mainland China and Hong Kong, which marks the first time it has received such detailed and specific commitments from China that China would allow PCAOB inspection and investigations meeting U.S. standards. However, it is uncertain whether the PCAOB will determine that it has sufficient access to inspect and review the work papers of Chinese auditors of U.S. listed companies and whether or how this recent development will affect the SEC’s designation of issuers under the HFCAA.
PART I – FINANCIAL INFORMATION
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial information and the accompanying notes included in our 2021 Annual Report.
Item 1. Financial Statements.
Zai Lab Limited
Unaudited condensed consolidated balance sheets
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
| Notes | September 30, 2022 | December 31, 2021 | |||||||||||||||
| $ | $ | ||||||||||||||||
| Assets | |||||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | 3 | ||||||||||||||||
| Short-term investments | |||||||||||||||||
Accounts receivable (net of allowance for credit loss of $ | |||||||||||||||||
| Notes receivable | |||||||||||||||||
| Inventories, net | 4 | ||||||||||||||||
| Value added tax recoverable - current | |||||||||||||||||
| Prepayments and other current assets | |||||||||||||||||
| Total current assets | |||||||||||||||||
| Restricted cash, non-current | |||||||||||||||||
Long term investments (including the fair value measured investment of $ | |||||||||||||||||
| Prepayments for equipment | |||||||||||||||||
| Property and equipment, net | 5 | ||||||||||||||||
| Operating lease right-of-use assets | |||||||||||||||||
| Land use rights, net | |||||||||||||||||
| Intangible assets, net | |||||||||||||||||
| Long-term deposits | |||||||||||||||||
| Value added tax recoverable | |||||||||||||||||
| Total assets | |||||||||||||||||
| Liabilities and shareholders’ equity | |||||||||||||||||
| Current liabilities: | |||||||||||||||||
| Accounts payable | |||||||||||||||||
| Current operating lease liabilities | |||||||||||||||||
| Other current liabilities | 8 | ||||||||||||||||
| Total current liabilities | |||||||||||||||||
| Deferred income | |||||||||||||||||
| Non-current operating lease liabilities | |||||||||||||||||
| Total liabilities | |||||||||||||||||
| Commitments and contingencies (Note 14) | |||||||||||||||||
| Shareholders’ equity | |||||||||||||||||
Ordinary shares (par value of $ | |||||||||||||||||
| Additional paid-in capital | |||||||||||||||||
| Accumulated deficit | ( | ( | |||||||||||||||
| Accumulated other comprehensive income (loss) | ( | ||||||||||||||||
Treasury Stock (at cost, | ( | ( | |||||||||||||||
| Total shareholders’ equity | |||||||||||||||||
| Total liabilities and shareholders’ equity | |||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
Zai Lab Limited
Unaudited condensed consolidated statements of operations
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
| Notes | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||
| Product revenue, net | 6 | ||||||||||||||||||||||||||||
| Collaboration revenue | 6 | ||||||||||||||||||||||||||||
| Total revenues | |||||||||||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||||||||
| Cost of sales | ( | ( | ( | ( | |||||||||||||||||||||||||
| Research and development | ( | ( | ( | ( | |||||||||||||||||||||||||
| Selling, general, and administrative | ( | ( | ( | ( | |||||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||||||||
| Interest income | |||||||||||||||||||||||||||||
| Other income (expenses), net | ( | ( | ( | ( | |||||||||||||||||||||||||
| Loss before income tax and share of loss from equity method investment | ( | ( | ( | ( | |||||||||||||||||||||||||
| Income tax expense | 7 | ||||||||||||||||||||||||||||
| Share of loss from equity method investment | ( | ( | ( | ||||||||||||||||||||||||||
| Net loss | ( | ( | ( | ( | |||||||||||||||||||||||||
| Net loss attributable to ordinary shareholders | ( | ( | ( | ( | |||||||||||||||||||||||||
| Loss per share - basic and diluted | 9 | ( | ( | ( | ( | ||||||||||||||||||||||||
| Weighted-average shares used in calculating net loss per ordinary share - basic and diluted | |||||||||||||||||||||||||||||
Loss per American Depositary Shares (“ADS”) - basic and diluted | ( | ( | ( | ( | |||||||||||||||||||||||||
| Weighted-average ADSs used in calculating net loss per ADS - basic and diluted | |||||||||||||||||||||||||||||
Note: All the numbers of ordinary shares and per share data in these unaudited condensed consolidated financial statements have been retrospectively adjusted as a result of the Share Subdivision and the ADS Ratio Change that became effective on March 30, 2022. The Share Subdivision and ADS Ratio Change did not result in any change to the number of outstanding ADSs of the Company. Refer to Note 2(a) for a detailed discussion.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Zai Lab Limited
Unaudited condensed consolidated statements of comprehensive loss
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||||||
| Net loss | ( | ( | ( | ( | |||||||||||||||||||||||||
Other comprehensive income (loss), net of tax of | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ||||||||||||||||||||||||||||
| Comprehensive loss | ( | ( | ( | ( | |||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Zai Lab Limited
Unaudited condensed consolidated statements of shareholders’ equity
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
| Ordinary Shares | Additional paid in capital | Accumulated deficit | Accumulated other comprehensive (loss) income | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares upon vesting of restricted shares | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Exercise of shares options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares upon vesting of restricted shares | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Exercise of shares options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares upon vesting of restricted shares | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Exercise of shares options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
4
| Ordinary Shares | Additional paid in capital | Accumulated deficit | Accumulated other comprehensive (loss) income | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | ( | ( | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares upon vesting of restricted shares | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Exercise of shares options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares in connection with collaboration and license arrangement | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance cost adjustment for secondary listing | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares upon vesting of restricted shares | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Exercise of shares option | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Issuance of ordinary shares upon follow-on public offering, net of issuance cost of $ | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares upon vesting of restricted shares | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Exercise of shares option | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance cost adjustment for follow-on public offering | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. “0” in above table means less than 1,000 dollars.
5
Zai Lab Limited
Unaudited condensed consolidated statements of cash flows
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| $ | $ | ||||||||||
| Operating activities | |||||||||||
| Net loss | ( | ( | |||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Allowance for credit (gain) loss | ( | ||||||||||
| Inventory write-down | |||||||||||
| Depreciation and amortization expenses | |||||||||||
| Amortization of deferred income | ( | ( | |||||||||
| Share-based compensation | |||||||||||
| Noncash research and development expenses | |||||||||||
| Share of loss from equity method investment | |||||||||||
| Loss from fair value changes of equity investment with readily determinable fair value | |||||||||||
| (Gain) loss on disposal of property and equipment | ( | ||||||||||
| Noncash lease expenses | |||||||||||
| Foreign currency remeasurement loss | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Notes receivable | ( | ||||||||||
| Inventories | ( | ||||||||||
| Prepayments and other current assets | ( | ( | |||||||||
| Long-term deposits | ( | ( | |||||||||
| Value added tax recoverable | ( | ||||||||||
| Accounts payable | ( | ( | |||||||||
| Other current liabilities | |||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Deferred income | |||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of short-term investments | ( | ( | |||||||||
| Proceeds from maturity of short-term investment | |||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| Purchase of intangible assets | ( | ( | |||||||||
| Payment for investment in equity investee | ( | ||||||||||
| Net cash provided by investing activities | |||||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from exercises of stock options | |||||||||||
| Proceeds from issuance of ordinary shares upon public offerings | |||||||||||
| Payment of public offering costs | ( | ||||||||||
| Employee taxes paid related to net share settlement of equity awards | ( | ( | |||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | ( | ||||||||||
| Net increase in cash, cash equivalents and restricted cash | |||||||||||
| Cash, cash equivalents and restricted cash - beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash - end of period | |||||||||||
| Supplemental disclosure on non-cash investing and financing activities: | |||||||||||
| Payables for purchase of property and equipment | |||||||||||
| Payables for intangible assets | |||||||||||
| Payables for treasury stock | |||||||||||
| Receivables for stock option exercise under equity incentive plans | |||||||||||
| Right-of-use asset acquired under operating leases | |||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash and cash equivalents | |||||||||||
| Restricted cash, non-current | |||||||||||
| Total cash and cash equivalents and restricted cash | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
1. Organization and principal activities
2. Basis of presentation and consolidation and significant accounting policies
(a) Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), and applicable rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 1, 2022 (the “2021 Annual Report”). The December 31, 2021 condensed consolidated balance sheet data included in this Quarterly Report on Form 10-Q were derived from the audited financial statements included in the 2021 Annual Report.
The accompanying condensed consolidated financial statements reflect all normal recurring adjustments that are necessary to present fairly the results for the interim periods presented. Interim results are not necessarily indicative of the results for the year ending December 31, 2022.
Effective as of March 30, 2022, the Company subdivided each of its issued and unissued ordinary shares into ten ordinary shares (the “Share Subdivision”). Following the Share Subdivision, the Company’s authorized share capital became $30,000 divided into 5,000,000,000 shares with a par value of $0.000006 per share. The numbers of issued and unissued ordinary shares and per share data as disclosed elsewhere in these unaudited condensed consolidated financial statements and notes thereto are presented on a basis after taking into account the effects of the Share Subdivision and have been retrospectively adjusted, where applicable. In connection with the Share Subdivision, the conversion ratio of our ADSs to ordinary shares changed from one ADS to one ordinary share to a new ratio of one ADS to ten ordinary shares (the “ADS Ratio Change”). The Share Subdivision and ADS Ratio Change did not result in any change to the number of outstanding ADSs of the Company.
A reclassification has been made within the condensed consolidated statement of cash flow for the nine months ended September 30, 2021 to conform to the current period presentation. The Company reclassified $2.8
(b) Principles of consolidation
(c) Use of estimates
7
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(d) Fair value measurements
As of September 30, 2022 and December 31, 2021, information about inputs into the fair value measurement of the Company’s assets that are measured at a fair value on a recurring basis in periods subsequent to their initial recognition is as follows (in thousands):
| Description | Fair Value as of September 30, 2022 $ | Fair Value Measurement at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level 1) US$ | |||||||||
| Equity Investments with Readily Determinable Fair Value | |||||||||||
| Description | Fair Value as of December 31, 2021 $ | Fair Value Measurement at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level 1) US$ | |||||||||
| Equity Investments with Readily Determinable Fair Value | |||||||||||
The Company did not have assets or liabilities measured at fair value on a nonrecurring basis during the periods presented.
(e) Recent accounting pronouncements
Adopted accounting standards
8
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(f) Significant accounting policies
3. Cash and cash equivalents
The following table presents the Company’s cash and cash equivalents as of September 30, 2022 and December 31, 2021 (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| $ | $ | ||||||||||
| Cash at bank and in hand | |||||||||||
| Cash equivalents (i) | |||||||||||
| Denominated in: | |||||||||||
| US$ | |||||||||||
| RMB (ii) | |||||||||||
| Hong Kong dollar (“HK$”) | |||||||||||
| Australian dollar (“A$”) | |||||||||||
| Taiwan dollar (“TW$”) | |||||||||||
(i)Cash equivalents represent short-term and highly liquid investments in a money market fund.
4. Inventories, net
The Company’s net inventory balance of $29.1 million and $19.0 million as of September 30, 2022 and December 31, 2021, respectively, mainly consisted of finished goods purchased from Tesaro Inc., now GlaxoSmithKline (“GSK”), for distribution in Hong Kong, from NovoCure Limited (“NovoCure”) for distribution in Hong Kong and mainland China, and from Deciphera Pharmaceuticals, LLC (“Deciphera”) for distribution in Hong Kong, mainland China and Taiwan, as well as finished goods and certain raw materials for ZEJULA and NUZYRA commercialization in mainland China. The following table presents the Company’s inventories, net, as of September 30, 2022 and December 31, 2021 (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| $ | $ | ||||||||||
| Finished goods | |||||||||||
| Raw materials | |||||||||||
| Work in Progress | |||||||||||
| Inventories, net | |||||||||||
The Company writes down inventory for any excess or obsolete inventories or when the Company believes that the net realizable value of inventories is less than the carrying value. The Company recorded write-downs in cost of sales of $0.3 million and $0.5 million during the three and nine months ended September 30, 2022, respectively, and of $0.1 million and $0.4 million during the three and nine months ended September 30, 2021, respectively.
9
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
5. Property and equipment, net
The following table presents the components of the Company’s property and equipment, net as of September 30, 2022 and December 31, 2021 (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
$ | $ | ||||||||||
| Office equipment | |||||||||||
| Electronic equipment | |||||||||||
| Vehicle | |||||||||||
| Laboratory equipment | |||||||||||
| Manufacturing equipment | |||||||||||
| Leasehold improvements | |||||||||||
| Construction in progress | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | |||||||||||
Depreciation expense was $2.1 million and $5.7 million for the three and nine months ended September 30, 2022, respectively, and $1.5 million and $4.3 million for the three and nine months ended September 30, 2021, respectively.
6. Revenue
Product revenue, net
The Company’s product revenue is primarily derived from the sales of ZEJULA, Optune, QINLOCK, and NUZYRA in mainland China and Hong Kong. The table below presents the Company’s net product sales for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
$ | $ | $ | $ | ||||||||||||||||||||
| Product revenue - gross | |||||||||||||||||||||||
| Less: Rebate and sales return | ( | ( | ( | ( | |||||||||||||||||||
| Product revenue - net | |||||||||||||||||||||||
Sales rebates are offered to distributors in mainland China, and the amounts are recorded as a reduction of revenue. Estimated rebates are determined based on contracted rates, sales volumes, and level of distributor inventories.
10
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
The following table presents net revenue by product for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| ZEJULA | |||||||||||||||||||||||
| Optune | |||||||||||||||||||||||
| QINLOCK | |||||||||||||||||||||||
| NUZYRA | |||||||||||||||||||||||
| Product revenue - net | |||||||||||||||||||||||
Collaboration revenue
The Company’s collaboration revenue was $0.6 million and $1.8 million for the three and nine months ended September 30, 2022, respectively, and nil
7. Income tax
The Company recorded a full valuation allowance against deferred tax assets of all its consolidated entities because all entities were in a cumulative loss position as of September 30, 2022 and December 31, 2021. No
8. Other current liabilities
The following table presents the Company’s other current liabilities as of September 30, 2022 and December 31, 2021 (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| $ | $ | ||||||||||
| Payroll | |||||||||||
| Accrued rebate to distributors | |||||||||||
| Tax payables | |||||||||||
| Accrued professional service fee | |||||||||||
| Other (i) | |||||||||||
| Payables for purchase of property and equipment | |||||||||||
| Total | |||||||||||
9. Loss per share
11
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net loss attributable to ordinary shareholders | ( | ( | ( | ( | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average number of ordinary shares - basic and diluted | |||||||||||||||||||||||
| Net loss per share - basic and diluted | ( | ( | ( | ||||||||||||||||||||