ZAI LAB(ZLAB) - 2021 Q3 - Quarterly Report

FORM 10-Q Filing Information Registrant Information Zai Lab Limited, a Cayman Islands company, filed its Form 10-Q for Q3 2021, with ADSs on Nasdaq and Ordinary Shares on HKEX - Registrant: ZAI LAB LIMITED, incorporated in Cayman Islands[3] - Filing Type: Quarterly Report on Form 10-Q for the period ended September 30, 2021[3] Class of Security and Exchange Registered On | Class of Security | Trading Symbol(s) | Exchange Registered On | | :---------------- | :---------------- | :--------------------- | | American Depositary Shares | ZLAB | The Nasdaq Global Market | | Ordinary Shares | 9688 | The Stock Exchange of Hong Kong Limited | Filing Status and Shares Outstanding Zai Lab is a large accelerated filer, compliant with SEC requirements, reporting 96.4 million ordinary shares outstanding as of October 31, 2021 - The registrant is a large accelerated filer[5] - The registrant has filed all required reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 and submitted all required Interactive Data Files[4] Shares Outstanding | Date | Ordinary Shares Outstanding | Ordinary Shares as ADSs | | :--- | :-------------------------- | :---------------------- | | Oct 31, 2021 | 96,408,743 | 68,893,502 | SPECIAL NOTES REGARDING THE COMPANY Forward-Looking Statements The report contains forward-looking statements subject to risks and uncertainties that may cause actual results to differ materially from expectations - The report contains forward-looking statements that involve risks and uncertainties, which may cause actual results to differ materially from expectations[8] - Forward-looking statements are based on management's beliefs and assumptions and are not guarantees of future performance[8] - Investors are cautioned that business and financial performance are subject to substantial risks and uncertainties, as discussed in the 'Risk Factors' section[8] Usage of Terms Defines key geographical terms like 'Greater China' and 'China,' and company references for clarity within the report - Greater China refers to mainland China, Hong Kong, Macau, and Taiwan; China refers to mainland China[9] - Zai Lab, the Company, we, us, and our refer to Zai Lab Limited and its consolidated subsidiaries[9] - Operating subsidiaries are domiciled in Hong Kong, China, Taiwan, and the United States[9] Disclosures Relating to Our Chinese Operations Operating primarily in China exposes the company to significant legal, political, and regulatory risks, including evolving data protection laws - Significant legal and operational risks are associated with having the majority of operations in China, including changes in legal, political, and economic policies of the Chinese government and US-China relations[10] - Compliance with China's new Data Security Law, Cybersecurity Review Measures, and Personal Information Protection Law may incur significant expenses and affect business operations, foreign investments, or U.S./foreign stock exchange listings[10] - The company is not currently required to obtain CSRC approval for issuing securities to foreign investors, but future changes in laws or interpretations could impose such requirements[11] Business Licenses for Chinese Subsidiaries All Chinese subsidiaries hold valid business licenses and necessary permits, ensuring compliance with local regulations - Each Chinese subsidiary has obtained a valid business license from the local SAMR counterpart[12] - Required licenses and permits, including Drug Manufacturing, Drug Distribution, and Medical Device Distribution Permits, have been obtained, with no applications denied[12] Dividends and Other Distributions Zai Lab, as a holding company, relies on Chinese subsidiary dividends, which are restricted by statutory reserves and Renminbi convertibility controls - Zai Lab is a holding company and relies on dividends from Chinese subsidiaries for cash and financing[13] - Chinese subsidiaries must set aside at least 10% of after-tax profits to a statutory reserve fund until it reaches 50% of registered capital, which cannot be distributed as dividends[14] - Renminbi is not freely convertible, and Chinese government controls on currency exchange may limit the ability of Chinese subsidiaries to remit foreign currency for dividends or other payments[15] PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents Zai Lab's unaudited condensed consolidated financial statements for periods up to September 30, 2021, prepared under U.S. GAAP Condensed Consolidated Balance Sheets Provides a snapshot of Zai Lab's financial position, detailing assets, liabilities, and shareholders' equity as of September 30, 2021 Condensed Consolidated Balance Sheets | Metric | Sep 30, 2021 ($) | Dec 31, 2020 ($) | Change ($) | Change (%) | | :----------------------------------- | :--------------- | :--------------- | :--------- | :--------- | | Assets | | | | | | Cash and cash equivalents | 1,398,498 | 442,116 | 956,382 | 216.3% | | Short-term investments | 170,000 | 744,676 | (574,676) | -77.2% | | Total current assets | 1,619,087 | 1,216,036 | 403,051 | 33.1% | | Total assets | 1,728,079 | 1,297,638 | 430,441 | 33.2% | | Liabilities | | | | | | Total current liabilities | 112,010 | 98,043 | 13,967 | 14.2% | | Total liabilities | 140,149 | 128,293 | 11,856 | 9.2% | | Shareholders' Equity | | | | | | Total shareholders' equity | 1,587,930 | 1,169,345 | 418,585 | 35.8% | Condensed Consolidated Statements of Operations Details Zai Lab's revenues, expenses, and net loss for the three and nine months ended September 30, 2021 Condensed Consolidated Statements of Operations (3 Months Ended Sep 30) | Metric | 3 Months Ended Sep 30, 2021 ($) | 3 Months Ended Sep 30, 2020 ($) | Change ($) | Change (%) | | :----------------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Revenue | 43,103 | 14,651 | 28,452 | 194.2% | | Cost of sales | (12,162) | (4,934) | (7,228) | 146.5% | | Research and development | (55,144) | (58,100) | 2,956 | -5.1% | | Selling, general and administrative | (59,002) | (27,874) | (31,128) | 111.7% | | Loss from operations | (83,205) | (76,257) | (6,948) | 9.1% | | Net loss | (96,412) | (63,741) | (32,671) | 51.3% | | Loss per share - basic and diluted | (1.01) | (0.84) | (0.17) | 20.2% | Condensed Consolidated Statements of Operations (9 Months Ended Sep 30) | Metric | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | Change ($) | Change (%) | | :----------------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Revenue | 100,141 | 33,864 | 66,277 | 195.7% | | Cost of sales | (30,535) | (9,914) | (20,621) | 208.0% | | Research and development | (401,220) | (160,149) | (241,071) | 150.5% | | Selling, general and administrative | (149,254) | (70,346) | (78,908) | 112.2% | | Loss from operations | (480,868) | (206,545) | (274,323) | 132.8% | | Net loss | (492,646) | (192,358) | (300,288) | 156.1% | | Loss per share - basic and diluted | (5.34) | (2.59) | (2.75) | 106.2% | Condensed Consolidated Statements of Comprehensive Loss Presents Zai Lab's net loss and other comprehensive loss components for the three and nine months ended September 30, 2021 Condensed Consolidated Statements of Comprehensive Loss (3 Months Ended Sep 30) | Metric | 3 Months Ended Sep 30, 2021 ($) | 3 Months Ended Sep 30, 2020 ($) | Change ($) | Change (%) | | :----------------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Net loss | (96,412) | (63,741) | (32,671) | 51.3% | | Foreign currency translation adjustments | 1,741 | (9,901) | 11,642 | -117.6% | | Comprehensive loss | (94,671) | (73,642) | (21,029) | 28.6% | Condensed Consolidated Statements of Comprehensive Loss (9 Months Ended Sep 30) | Metric | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | Change ($) | Change (%) | | :----------------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Net loss | (492,646) | (192,358) | (300,288) | 156.1% | | Foreign currency translation adjustments | (600) | (7,535) | 6,935 | -92.0% | | Comprehensive loss | (493,246) | (199,893) | (293,353) | 146.7% | Condensed Consolidated Statements of Shareholders' Equity Outlines changes in Zai Lab's shareholders' equity, including ordinary shares, additional paid-in capital, and accumulated deficit Condensed Consolidated Statements of Shareholders' Equity | Metric | Dec 31, 2020 ($) | Sep 30, 2021 ($) | Change ($) | Change (%) | | :----------------------------------- | :--------------- | :--------------- | :--------- | :--------- | | Ordinary shares (amount) | 5 | 6 | 1 | 20.0% | | Additional paid-in capital | 1,897,467 | 2,812,830 | 915,363 | 48.2% | | Accumulated deficit | (713,603) | (1,206,249) | (492,646) | 69.0% | | Accumulated other comprehensive loss | (14,524) | (15,124) | (600) | 4.1% | | Treasury Stock (amount) | — | (3,533) | (3,533) | N/A | | Total shareholders' equity | 1,169,345 | 1,587,930 | 418,585 | 35.8% | Condensed Consolidated Statements of Cash Flows Summarizes Zai Lab's cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2021 Condensed Consolidated Statements of Cash Flows (9 Months Ended Sep 30) | Metric | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | Change ($) | Change (%) | | :----------------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Net cash used in operating activities | (396,237) | (171,720) | (224,517) | 130.7% | | Net cash provided by (used in) investing activities | 531,446 | (754,881) | 1,286,327 | -170.4% | | Net cash provided by financing activities | 820,478 | 1,024,486 | (204,008) | -19.9% | | Net increase in cash, cash equivalents and restricted cash | 956,382 | 99,947 | 856,435 | 856.9% | | Cash, cash equivalents and restricted cash - end of period | 1,399,241 | 176,389 | 1,222,852 | 693.3% | Notes to the Unaudited Condensed Consolidated Financial Statements Provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements 1. Organization and principal activities Describes Zai Lab Limited's incorporation, core focus on therapies for unmet medical needs, and primary geographic markets - Zai Lab Limited was incorporated in the Cayman Islands on March 28, 2013[34] - The Group focuses on developing and commercializing therapies for unmet medical needs in oncology, autoimmune disorders, and infectious diseases[34] - Principal operations and geographic markets are in Greater China (mainland China, Hong Kong, Macau, Taiwan) and the United States[34] 2. Basis of presentation and consolidation and significant accounting policies Explains the preparation basis for financial statements, adoption of new accounting standards, and key management judgments - Unaudited condensed consolidated financial statements are prepared in accordance with Form 10-Q instructions and Article 10 of Regulation S-X, reflecting normal recurring adjustments[35] - The Group adopted ASU 2019-12, Income Taxes (Topic 740), on January 1, 2021, with no material impact[46] - Management uses subjective judgment in areas such as estimating useful lives of assets, credit losses, impairment, discount rates, R&D expense allocation, share-based compensation, and deferred tax asset recoverability[37] 3. Cash and cash equivalents Details the composition of Zai Lab's cash and cash equivalents, including bank balances and short-term liquid investments Cash and Cash Equivalents by Category | Category | Sep 30, 2021 ($) | Dec 31, 2020 ($) | | :------------------- | :--------------- | :--------------- | | Cash at bank and in hand | 1,097,430 | 441,283 | | Cash equivalents | 301,068 | 833 | | Total | 1,398,498 | 442,116 | Cash and Cash Equivalents by Denomination | Denomination | Sep 30, 2021 ($) | Dec 31, 2020 ($) | | :------------------- | :--------------- | :--------------- | | US$ | 762,209 | 297,813 | | RMB | 28,802 | 23,898 | | HK$ | 607,323 | 119,695 | | A$ | 134 | 710 | | TW$ | 30 | — | | Total | 1,398,498 | 442,116 | - Cash equivalents primarily represent short-term, highly liquid investments in a money market fund[48] 4. Restricted cash, non-current Explains non-current restricted cash held as collateral for letters of credit Restricted Cash, Non-Current | Metric | Sep 30, 2021 ($) | Dec 31, 2020 ($) | | :------------------- | :--------------- | :--------------- | | Restricted cash, non-current | 743 | 743 | - Restricted cash represents long-term bank deposits held as collateral for letters of credit, to be released upon settlement[49] 5. Short-term investments Describes short-term investments as held-to-maturity debt instruments, primarily time deposits with high credit ratings - Short-term investments consist entirely of held-to-maturity debt instruments with high credit ratings and remote risk of expected credit loss[49] - These investments are primarily time deposits with original maturities between three months and one year[49] 6. Inventories Details the composition of inventories, including finished goods and raw materials, and recorded write-downs Inventories | Category | Sep 30, 2021 ($) | Dec 31, 2020 ($) | | :------------------- | :--------------- | :--------------- | | Finished goods | 5,298 | 3,041 | | Raw materials | 7,196 | 10,103 | | Total Inventories | 12,494 | 13,144 | - Inventories mainly consist of finished goods for ZEJULA, Optune, and QINLOCK distribution in Hong Kong and China, and raw materials for ZEJULA commercialization in China[52] - Inventory write-downs of $0.112 million and $0.402 million were recorded for the three and nine months ended September 30, 2021, respectively[53] 7. Long-term investments Discusses Zai Lab's equity-method investment in JING Medicine and fair value loss from an equity investment in MacroGenics - The Group holds an equity-method investment in JING Medicine Technology (Shanghai) Ltd., representing 18% equity interest as of September 30, 2021[54] - A fair value loss of $9.93 million was recognized for the three and nine months ended September 30, 2021, from an equity investment in MacroGenics Inc. common stock made in July 2021[55] 8. Property and equipment, net Provides a breakdown of Zai Lab's property and equipment, net of accumulated depreciation Property and Equipment, Net | Category | Sep 30, 2021 ($) | Dec 31, 2020 ($) | | :------------------- | :--------------- | :--------------- | | Office equipment | 802 | 430 | | Electronic equipment | 3,771 | 2,646 | | Vehicle | 217 | 143 | | Laboratory equipment | 15,274 | 11,933 | | Manufacturing equipment | 13,313 | 12,198 | | Leasehold improvements | 9,909 | 9,641 | | Construction in progress | 8,306 | 2,423 | | Total | 51,592 | 39,414 | | Less: accumulated depreciation | (14,505) | (10,252) | | Property and equipment, net | 37,087 | 29,162 | - Depreciation expenses were $1.51 million for the three months and $4.257 million for the nine months ended September 30, 2021[58] 9. Revenue Details Zai Lab's product revenue, including gross sales, rebates, and net revenue by product Product Revenue | Metric | 3 Months Ended Sep 30, 2021 ($) | 3 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | | :------------------- | :------------------------------ | :------------------------------ | :------------------------------ | :------------------------------ | | Product revenue - gross | 47,555 | 17,152 | 135,490 | 37,567 | | Less: Rebate and sales return | (4,452) | (2,501) | (35,349) | (3,703) | | Product revenue - net | 43,103 | 14,651 | 100,141 | 33,864 | Net Product Revenue by Product | Product | 3 Months Ended Sep 30, 2021 ($) | 3 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | | :------------------- | :------------------------------ | :------------------------------ | :------------------------------ | :------------------------------ | | ZEJULA | 28,162 | 8,503 | 64,134 | 22,294 | | Optune | 10,653 | 5,950 | 27,318 | 11,372 | | QINLOCK | 4,288 | 198 | 8,689 | 198 | | Total product revenue - net | 43,103 | 14,651 | 100,141 | 33,864 | - Sales rebates are recorded as a reduction of revenue, including $22.009 million compensation to distributors for ZEJULA due to NRDL inclusion for the nine months ended September 30, 2021[60][61] 10. Income Tax Explains that no income tax provision was accrued due to cumulative losses, resulting in a full valuation allowance against deferred tax assets - No provision for income taxes was accrued as the Company and its subsidiaries are in cumulative loss positions[63] - A full valuation allowance was recorded against deferred tax assets due to the cumulative loss position[63] - No unrecognized tax benefits or related interest and penalties were recorded[63] 11. Other current liabilities Itemizes other current liabilities, highlighting increases in payroll, accrued rebates, and tax payables Other Current Liabilities | Category | Sep 30, 2021 ($) | Dec 31, 2020 ($) | | :------------------- | :--------------- | :--------------- | | Payroll | 18,926 | 13,694 | | Accrued professional service fee | 3,607 | 3,128 | | Payables for purchase of property and equipment | 1,797 | 788 | | Accrued rebate to distributors | 10,803 | 7,067 | | Tax payable | 10,989 | 952 | | Others | 8,170 | 4,567 | | Total | 54,292 | 30,196 | - Other current liabilities increased by $24.096 million (79.8%) from December 31, 2020, to September 30, 2021, primarily driven by increases in payroll, accrued rebates, and tax payables[66] 12. Loss per share Presents basic and diluted net loss per share, along with the weighted average number of ordinary shares outstanding Loss Per Share (3 Months Ended Sep 30) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Net loss attributable to ordinary shareholders ($) | (96,412) | (63,741) | | Weighted average number of ordinary shares - basic and diluted | 95,035,432 | 75,436,646 | | Net loss per share - basic and diluted ($) | (1.01) | (0.84) | Loss Per Share (9 Months Ended Sep 30) | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Net loss attributable to ordinary shareholders ($) | (492,646) | (192,358) | | Weighted average number of ordinary shares - basic and diluted | 92,174,838 | 74,381,115 | | Net loss per share - basic and diluted ($) | (5.34) | (2.59) | - Share options and non-vested restricted shares were excluded from diluted loss per share calculation due to net loss, making their inclusion anti-dilutive[68] 13. Related party transactions Discloses R&D expenses incurred with MEDx (Suzhou) Translational Medicine Co., Ltd., a related party - The Group incurred $96 thousand and $303 thousand in R&D expenses with MEDx (Suzhou) Translational Medicine Co., Ltd. for the three and nine months ended September 30, 2021, respectively[71] - MEDx (Suzhou) Translational Medicine Co., Ltd. has significant influence held by Samantha Du's (CEO) immediate family[70] 14. Share-based compensation Details share option grants and restricted share compensation expenses for the periods presented - The Group granted 553,198 share options in the nine months ended September 30, 2021, with a weighted-average grant-date fair value of $82.21 per share[73][74] Share Option Compensation Expense | Category | 3 Months Ended Sep 30, 2021 ($) | 3 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | | :----------------------------------- | :------------------------------ | :------------------------------ | :------------------------------ | :------------------------------ | | Selling, general and administrative (Share Options) | 4,119 | 2,952 | 11,501 | 8,500 | | Research and development (Share Options) | 3,056 | 2,411 | 8,450 | 7,218 | | Total Share Option Compensation Expense | 7,175 | 5,363 | 19,951 | 15,718 | Restricted Share Compensation Expense | Category | 3 Months Ended Sep 30, 2021 ($) | 3 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | | :----------------------------------- | :------------------------------ | :------------------------------ | :------------------------------ | :------------------------------ | | Selling, general and administrative (Restricted Shares) | 2,028 | 1,065 | 5,078 | 3,179 | | Research and development (Restricted Shares) | 1,353 | 550 | 3,077 | 1,508 | | Total Restricted Share Compensation Expense | 3,381 | 1,615 | 8,155 | 4,687 | 15. Licenses and collaborative arrangement Outlines Zai Lab's extensive collaboration agreements, upfront payments, and potential future milestone obligations - The Group has ongoing collaboration agreements with GSK (niraparib), MacroGenics (margetuximab, tebotelimab, TRIDENT molecule, and four immuno-oncology molecules), Deciphera (ripretinib), Turning Point (repotrectinib, TPX-0022), Five Prime (bemarituzumab), Cullinan (CLN-081), Takeda, argenx (efgartigimod), and Mirati (adagrasib)[82][84][86][90][91][92][93][95][96][97][99] - Upfront payments and milestone payments for development and regulatory achievements are recorded as R&D expenses, totaling $274.3 million for the nine months ended September 30, 2021[114][135] - Future contingent milestone payments could aggregate approximately $4.879 billion, dependent on achieving contractually specified development milestones[103] - As an upfront payment to argenx, the Group issued 568,182 ordinary shares with a fair value of $62.25 million in January 2021, recorded as R&D expense[98] 16. Restricted net assets Explains restrictions on dividend payments from Chinese subsidiaries due to PRC laws requiring statutory reserves - The Group's ability to pay dividends depends on distributions from Chinese subsidiaries, which are restricted by PRC laws requiring statutory reserves (10% of annual after-tax profit until 50% of registered capital)[104][105] - As of September 30, 2021, restricted amounts (paid-in capital of Chinese subsidiaries) totaled $306.01 million, up from $255.858 million as of December 31, 2020[106] - No appropriation to statutory reserves was made for the three and nine months ended September 30, 2021 and 2020, due to substantial losses[105] 17. Commitments and Contingencies Discloses purchase commitments for property and equipment and contingent obligations for future milestone fees and royalties - As of September 30, 2021, purchase commitments for property and equipment totaled $24.191 million, expected to be incurred within one year[107] - The Group has obligations for future milestone fees and royalties under license and collaboration agreements, which are not included on the balance sheet as they are contingent and not fixed or determinable[108] 18. Subsequent Event Reports on new license agreements and share option grants occurring after the reporting period - In November 2021, the Group entered into license agreements with Blueprint Medicines Corporation for BLU-701 and BLU-945 (upfront fee $25 thousand, potential milestones up to $590 thousand) and Karuna Therapeutics, Inc. for KarXT (upfront fee $35 thousand, potential milestones up to $152 thousand) in Greater China[110] - In October and November 2021, the Group granted 152,766 share options and authorized 78,055 ordinary shares for restricted grants to management, employees, and independent directors[110] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's analysis of Zai Lab's financial performance, strategic focus, and the impact of operational factors Overview Zai Lab is a global biopharmaceutical company focused on oncology, autoimmune, and infectious diseases, currently incurring net losses due to R&D investments - Zai Lab is a patient-focused, innovative, commercial-stage, global biopharmaceutical company with a substantial presence in Greater China and the United States[113] - The company focuses on discovering, developing, and commercializing innovative products for oncology, autoimmune disorders, and infectious diseases[113] - As of November 9, 2021, Zai Lab has three commercialized products (ZEJULA, Optune, QINLOCK) and thirteen programs in late-stage product development[113] - The company has incurred net losses and negative cash flows primarily due to funding research and development programs and general and administrative costs[114] Recent Developments Highlights recent product approvals, clinical trial advancements, and the impact of evolving Chinese regulatory landscape on operations - ZEJULA approved in Hong Kong (August 2021) as maintenance treatment for high-grade serous epithelial ovarian cancer, without requiring BRCA mutation testing[116] - QINLOCK NDA approved in Taiwan (September 2021) for advanced gastrointestinal stromal tumors (GIST) after prior kinase inhibitor treatments[116] - Bemarituzumab granted Breakthrough Therapy Designation by China's NMPA (September 2021) for first-line treatment of FGFR2b-overexpressing, HER2-negative metastatic gastric and GEJ cancers[119] - Repotrectinib granted Breakthrough Therapy Designation by FDA (October 2021) for advanced solid tumors with NTRK gene fusion[121] - ZL-1102 achieved proof-of-concept in Phase 1b psoriasis study (October 2021), showing clinical improvement[122] - New license and collaboration agreements signed in November 2021 with Blueprint Medicines for BLU-701 and BLU-945, and with Karuna Therapeutics for KarXT, both for Greater China[123][124] - China's government published opinions on cracking down illegal securities activities and increasing supervision of overseas listings by China-based companies, with interpretation and implementation remaining unclear[124] - Draft amendment to Cybersecurity Review Measures (July 2021) proposes mandatory cybersecurity review for critical information infrastructure operators or data processing operators with over one million users seeking foreign listings[125] - PRC Personal Information Protection Law (PIPL) became effective November 1, 2021, establishing a comprehensive data privacy framework with significant penalties for violations[129] - Draft Measures on Security Assessment of Cross-Border Data Transfer (October 2021) propose mandatory security assessments for certain data transfers out of China, including personal information of over one million individuals[130] Factors Affecting our Results of Operations Discusses key factors influencing financial performance, including R&D expenses, SG&A costs, commercialization efforts, and licensing arrangements - Research and Development Expenses: Expected to increase significantly due to advancing 13 late-stage clinical product candidates and ongoing R&D, including upfront and milestone payments from licensing agreements ($274.3 million for nine months ended Sep 30, 2021)[131][135] - Selling, General and Administrative Expenses: Anticipated to increase to support commercial and R&D activities, including increased headcount, share compensation, product distribution, and public company expenses[133] - Ability to Commercialize Product Candidates: Revenue generation is dependent on regulatory approvals and successful commercialization of product candidates, which requires substantial investment and marketing efforts[134] - License Arrangements: Upfront and milestone payments under licensing agreements significantly impact R&D expenses ($274.3 million for nine months ended Sep 30, 2021, vs. $77.6 million for nine months ended Sep 30, 2020)[135] Key Components of Results of Operations Explains the tax implications for Zai Lab's operations in the Cayman Islands, People's Republic of China, and Hong Kong - Cayman Islands: Zai Lab Limited is incorporated in the Cayman Islands, which levies no taxes on profits, income, gains, or appreciation[136] - People's Republic of China: Chinese subsidiaries are subject to a standard EIT rate of 25% on taxable profits, with tax losses carried forward for up to five years[137] - Hong Kong: Hong Kong subsidiaries are subject to two-tiered profits tax rates (8.25% for first HK**$2 million**, 16.5% above HK**$2 million**), but had no assessable profit for the nine months ended September 30, 2021 and 2020[139] Results of Operations Provides a detailed breakdown of Zai Lab's revenue, expenses, and net loss, explaining significant changes year-over-year Results of Operations (3 Months Ended Sep 30) | Metric | 3 Months Ended Sep 30, 2021 ($) | 3 Months Ended Sep 30, 2020 ($) | Change ($) | Change (%) | | :----------------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Revenue | 43,103 | 14,651 | 28,452 | 194.2% | | Research and Development Expenses | 55,144 | 58,100 | (2,956) | -5.1% | | Selling, General and Administrative Expenses | 59,002 | 27,874 | 31,128 | 111.7% | | Net Loss Attributable to Ordinary Shareholders | (96,412) | (63,741) | (32,671) | 51.3% | Results of Operations (9 Months Ended Sep 30) | Metric | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | Change ($) | Change (%) | | :----------------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Revenue | 100,141 | 33,864 | 66,277 | 195.7% | | Research and Development Expenses | 401,220 | 160,149 | 241,071 | 150.5% | | Selling, General and Administrative Expenses | 149,254 | 70,346 | 78,908 | 112.2% | | Net Loss Attributable to Ordinary Shareholders | (492,646) | (192,358) | (300,288) | 156.1% | - R&D expenses for the nine months ended September 30, 2021, increased by $241.1 million, primarily due to a $196.7 million increase in licensing fees for new agreements and milestone payments[164] - SG&A expenses for the nine months ended September 30, 2021, increased by $78.9 million, mainly due to a $44.6 million increase in personnel compensation and related costs from hiring more commercial and administrative staff[170] Critical Accounting Policies and Significant Judgments and Estimates Outlines critical accounting policies and significant management judgments, including revenue recognition, share-based compensation, fair value measurements, and income taxes - Revenue recognition: Revenue from product sales is recognized when control transfers to customers, typically upon delivery[178][179] - Rebates to distributors are estimated and recorded as a reduction of revenue[182] - Share-Based Compensation: Awards to employees, management, and directors are measured at grant-date fair value and expensed over the vesting period using a graded vesting method[184] - Fair value of stock options is determined using the Black-Scholes model[185] - Fair Value Measurements: The Group applies ASC Topic 820, using a three-tier hierarchy (Level 1, 2, 3)[186][187][188] - Equity investments with readily determinable fair values are measured at fair value, with changes recognized in the statement of operations[189] - Income Taxes: The liability method is used, with deferred tax assets and liabilities determined by temporary differences[190][191] - A full valuation allowance is recorded against deferred tax assets due to cumulative loss positions, and tax positions are recognized if 'more likely than not' to prevail[192][194] B. Liquidity and Capital Resources Discusses Zai Lab's financing history, cash flow activities, and current liquidity position to fund future operations - The company has financed activities primarily through private placements, Nasdaq IPO, Hong Kong secondary listing, and follow-on offerings, raising approximately $2.463 billion in net proceeds through September 30, 2021[196] - Net cash used in operating activities was $396.2 million for the nine months ended September 30, 2021, an increase from $171.7 million in the prior year[196][200] Cash Flow Summary (9 Months Ended Sep 30) | Metric | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | | :----------------------------------- | :------------------------------ | :------------------------------ | | Net cash used in operating activities | (396,237) | (171,720) | | Net cash provided by (used in) investing activities | 531,446 | (754,881) | | Net cash provided by financing activities | 820,478 | 1,024,486 | | Net increases in cash, cash equivalents and restricted cash | 956,382 | 99,947 | - As of September 30, 2021, cash, cash equivalents, restricted cash, and short-term investments totaled $1.569 billion, expected to fund operating expenses and capital expenditures for at least the next 12 months[197] C. Research and Development, Patents and Licenses, etc. Refers to other sections for details on research and development activities and expenditures - Details of research and development activities and expenditures are provided in the 'Research and Development Expenses' and 'Results of Operations' sections[204] D. Trend Information States no other material adverse trends, uncertainties, demands, commitments, or events are currently known - No other trends, uncertainties, demands, commitments, or events are aware of that are reasonably likely to have a material adverse effect on revenue, income, profitability, liquidity, or capital resources[205] E. Off-balance Sheet Arrangements Confirms the company does not engage in off-balance sheet arrangements or trading activities involving non-exchange traded contracts - The company does not engage in trading activities involving non-exchange traded contracts, interest rate swap transactions, or foreign currency forward contracts[206] - The company does not enter into transactions with unconsolidated entities or financial partnerships for off-balance sheet arrangements[206] F. Tabular Disclosure of Contractual Obligations Provides a tabular summary of Zai Lab's contractual obligations, excluding contingent milestone fees and royalties Contractual Obligations | Obligation Type | Total ($) | Less than 1 year ($) | 1 to 3 years ($) | 3 to 5 years ($) | More than 5 years ($) | | :-------------------- | :-------- | :------------------- | :--------------- | :--------------- | :-------------------- | | Purchase Obligations | 24,191 | 24,191 | — | — | — | | Operating Lease Obligations | 17,497 | 6,573 | 5,349 | 4,160 | 1,415 | - Obligations for milestone fees and royalties to third-party licensors are not included in the table as they are cancellable if milestones are not met and their achievement/timing is not fixed or determinable[208] Item 3. Quantitative and Qualitative Disclosures About Market Risk Discusses Zai Lab's exposure to market risks, including foreign exchange, credit, interest rate, and liquidity risks, particularly concerning RMB convertibility - The company is exposed to foreign exchange risk, credit risk, cash flow interest rate risk, and liquidity risk[211] - RMB is not freely convertible, and its value is subject to Chinese government policies and international economic developments, affecting the value of investments in ADSs[212][214] - A significant portion of cash is kept in Hong Kong dollars (HKD) and U.S. dollars (USD), making the company's value affected by exchange rates between USD, HKD, and RMB[215] - Credit risk is primarily attributable to cash, cash equivalents, and short-term investments, which are held by major financial institutions in China and internationally with high credit quality[217] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material changes in internal control - Management concluded that disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2021[220] - No material changes in internal controls over financial reporting occurred during the nine months ended September 30, 2021[221] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently a party to any material legal or administrative proceedings, and management anticipates no material adverse effects from potential claims - The company is not currently a party to any actual or threatened material legal or administrative proceedings[222] - Management does not believe that the ultimate resolution of potential claims and suits will have a material adverse effect on financial position or results of operations[222] Item 1A. Risk Factors Updates on significant risks, including US-China relations, potential ADS delisting, and stringent Chinese data protection laws, which could impact operations and share value - Changes in US-China relations and regulations may adversely impact business, operating results, ability to raise capital, and market price of ordinary shares/ADSs[223] - The company's auditor is not inspected by the PCAOB due to restrictions in China, which could lead to additional Nasdaq listing criteria, penalties, or delisting of ADSs under the HFCA Act (or AHFCA Act)[227][235] - Failure to comply with rapidly evolving data protection laws in China (e.g., Cyber Security Law, Data Security Law, PIPL, HGR Regulation) could result in government enforcement actions, significant penalties, operational disruptions, and reputational damage[239][244][248][251][256] - Uncertainties in the China legal system, including new guidance on overseas listings and the civil law system's limited precedential value, could materially and adversely affect the company's operations and ability to enforce contractual rights[259][260] - If the Chinese government determines the corporate structure does not comply with regulations, or if regulations change, the value of ADSs and ordinary shares may decline or become worthless[262] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. No unregistered sales of equity securities or use of proceeds were reported for the period Item 3. Defaults upon Senior Securities No defaults upon senior securities were reported for the period Item 4. Mine Safety Disclosures No mine safety disclosures were reported for the period Item 5. Other Information No other information was reported for the period Item 6. Exhibits Lists all exhibits filed with the Form 10-Q, including organizational documents, deposit agreements, certifications, and XBRL taxonomy documents - Exhibits include Fifth Amended and Restated Memorandum and Articles of Association, Form of Deposit Agreement, Certifications of CEO and CFO, and Inline XBRL documents[272]