10-Q 1 d208371d10q.htm FORM 10-Q Form 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
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
 
 
ZAI LAB LIMITED
(Exact Name of Registrant as Specified in its Charter)
 
 
 
Cayman Islands
 
98-1144595
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
   
4560 Jinke Road
Bldg. 1, Fourth Floor
Pudong
ShanghaiChina
 
201210
(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
American Depositary Shares, each representing 1 Ordinary Share, par value $0.00006 per share
 
ZLAB
 
The Nasdaq Global Market
Ordinary Shares, par value $0.00006 per share*
 
9688
 
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  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer      Accelerated filer  
       
Non-accelerated
filer
     Smaller reporting company  
       
Emerging growth company           
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  ☐    No  
As of October 31, 2021, 96,408,743 ordinary shares of the registrant, par value $0.00006 per share, were outstanding, of which 68,893,502 ordinary shares were held in the form of American Depositary Shares.
 
 
 

Zai Lab Limited
Quarterly Report on Form
10-Q
 
        
Page
 
PART I.
    
 
4
 
Item 1.
  Financial Statements (Unaudited)      5  
         5  
         6  
         7  
         8  
         9  
         10  
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations      26  
Item 3.
  Quantitative and Qualitative Disclosures about Market Risk      41  
Item 4.
  Controls and Procedures      42  
PART II.
    
 
42
 
Item 1.
  Legal Proceedings      42  
Item 1A.
  Risk Factors      42  
Item 2.
  Unregistered Sales of Equity Securities and Use of Proceeds      53  
Item 3.
  Defaults upon Senior Securities      53  
Item 4.
  Mine Safety Disclosures      53  
Item 5.
  Other Information      53  
Item 6.
  Exhibits      54  
     55  

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 risk factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020, and the additional risk factors discussed in the “Risk Factors” section in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 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 to our management. 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.
We caution investors that our business and financial performance are subject to substantial risks and uncertainties.
Usage of Terms
Unless the context requires otherwise, references in this Quarterly Report on Form
10-Q
to “Greater China” refers to mainland China, Hong Kong, Macau, and Taiwan and “China” refers to mainland China and references in this Quarterly Report on Form
10-Q
to “Zai Lab,” the “Company,” “we,” “us,” and “our” refer to Zai Lab Limited, a holding company, and its subsidiaries, on a consolidated basis. Our operating subsidiaries comprise 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 China; Zai Lab International Trading (Shanghai) Co., Ltd., domiciled in China; Zai Lab (Suzhou) Co., Ltd., domiciled in China; Zai Biopharmaceutical (Suzhou) Co., Ltd., domiciled in China; Zai Lab Trading (Suzhou) Co., Ltd., domiciled in China; Zai Lab (Taiwan) Limited, domiciled in Taiwan; Zai Lab (US) LLC, domiciled in the United States. Additionally, as of the date of this Quarterly Report on Form 10-Q, Zai Auto Immune (Hong Kong) Limited and Zai Anti Infectives (Hong Kong) Limited have non-substantial business operations.
Disclosures Relating to Our Chinese Operations
There are significant legal and operational risks associated with having the majority of our operations in China, including that changes in the legal, political and economic policies of the Chinese government, the relations between China and the United States, or Chinese or United States regulations may materially and adversely affect our business, financial condition, results of operations and the market price of our ADSs or ordinary shares. Any such changes could significantly limit or completely hinder our ability to offer or continue to offer our ADSs or ordinary shares to investors, and could cause the value of our ADSs or ordinary shares to significantly decline or become worthless. Recent statements made and regulatory actions undertaken by China’s government, including the recent enactment of China’s new Data Security Law, as well as our obligations to comply with China’s Cybersecurity Review Measures (Revised Draft for Comment), regulations and guidelines relating to the multi-level protection scheme, Personal Information Protection Law 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 the risk factors discussed in the “Risk Factors” section of our Annual Report on Form
10-K
for the year ended December 31, 2020 and the risk factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020, and the additional risk factors discussed in the “Risk Factors” section in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 and this Quarterly Report on Form 10-Q.
 
1

As of the date of this Quarterly Report on Form
10-Q,
we are not required to obtain approval or prior permission from the China Securities Regulatory Commission or any other Chinese regulatory authority under the Chinese laws and regulations currently in effect to issue securities to foreign investors. However, as there are uncertainties with respect to the Chinese legal system and changes in laws, regulations and policies, including how those laws and regulations will be interpreted or implemented, there can be no assurance that we will not be subject to such 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. For more information on these required permissions, see the “Recent Legal and Regulatory Developments” section below in Part I, Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operation), the risk factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020, and the additional risk factors discussed in the “Risk Factors” section in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 and this Quarterly Report on Form 10-Q.
Business Licenses for Chinese Subsidiaries
To operate our general business activities currently conducted in China, each of our Chinese subsidiaries is required to obtain a business license from the local counterpart of the State Administration for Market Regulation, or 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: Drug Manufacturing Permits, Drug Distribution Permits and Medical Device Distribution Permits to manufacture and/or distribute drugs and applicable medical devices, and no application for any such material license or permit has been denied.
Dividends and Other Distributions
We are a holding company, and we may rely on dividends and other distributions on equity paid by our Chinese subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders or holders of our ADSs or to service any debt we may incur. If any of our Chinese subsidiaries incur debt on its own behalf in the future, the instruments governing such debt may restrict their ability to pay dividends to us. To date, there have not been any such dividends or other distributions from our Chinese subsidiaries to our subsidiaries located in or outside of China. In addition, as of the date of this Quarterly Report on Fo
r
m
 
10-Q,
 
none of our subsidiaries have ever issued any dividends or distributions to us or their respective shareholders in or outside of China, and neither we nor any of our subsidiaries have ever directly or indirectly paid dividends or made distributions to U.S. investors. Zai Lab (Shanghai) Co., Ltd., an operating subsidiary of ours that is domiciled in China, received $266.5 million in capital contributions via twenty-two separate contributions from Zai Lab (Hong Kong) Limited, its sole shareholder, domiciled outside of China, from 2014 to 2021, to fund its business operations in China. Zai Lab International Trading (Shanghai) Co., Ltd., an operating subsidiary of ours that is domiciled in China, received RMB1.0 million in capital contributions via contributions from Zai Lab (Shanghai) Co., Ltd., its sole shareholder, in 2019 to fund its business operations in China. Zai Lab (Suzhou) Co., Ltd., an operating subsidiary of ours that is domiciled in China, received RMB166.5 million in capital contributions via ten separate contributions from Zai Lab (Hong Kong) Limited, its sole shareholder, domiciled outside of China, from 2015 to 2019 to fund its business operations in China. Zai Lab Trading (Suzhou) Co., Ltd., an operating subsidiary of ours that is domiciled in China, received RMB1.0 million in capital contributions via contributions from Zai Lab (Suzhou) Co., Ltd., its sole shareholder, in 2020 to fund its business operations in China. Zai Biopharmaceutical (Suzhou) Co., Ltd., an operating subsidiary of ours that is domiciled in China, received $15.0 million in capital contributions via four separate contributions from Zai Lab (Hong Kong) Limited, its sole shareholder, domiciled outside of China, from 2017 to 2018 to fund its business operations in China. In the future, cash proceeds raised from our overseas financing activities may be transferred by us to our Chinese subsidiaries via capital contribution or shareholder loans or intercompany loans, as the case may be.
2

According to the Foreign Investment Law of the People’s Republic of China and its implementing rules, which jointly established the legal framework for the administration of foreign-invested companies, a foreign investor may, in accordance with other applicable laws, freely transfer into or out of China its contributions, profits, capital earnings, income from asset disposal, intellectual property rights, royalties acquired, compensation or indemnity legally obtained, and income from liquidation, made or derived within the territory of China in RMB or any foreign currency, and any entity or individual shall not illegally restrict such transfer in terms of the currency, amount and frequency. According to the Company Law of the People’s Republic of China and other Chinese laws and regulations, our Chinese subsidiaries may pay dividends only out of their respective accumulated profits as determined in accordance with Chinese accounting standards and regulations. In addition, each of our Chinese subsidiaries is required to set aside at least 10% of its accumulated
after-tax
profits, if any, each year to fund a certain statutory reserve fund, until the aggregate amount of such fund reaches 50% of its registered capital. Where the statutory reserve fund is insufficient to cover any loss the Chinese subsidiary incurred in the previous financial year, its current financial year’s accumulated
after-tax
profits shall first be used to cover the loss before any statutory reserve fund is drawn therefrom. Such statutory reserve funds and the accumulated
after-tax
profits that are used for covering the loss cannot be distributed to us as dividends. At their discretion, our Chinese subsidiaries may allocate a portion of their
after-tax
profits based on Chinese accounting standards to a discretionary reserve fund.
Renminbi is not freely convertible into other currencies. As a result, any restriction on currency exchange may limit the ability of our Chinese subsidiaries to use their potential future Renminbi revenues to pay dividends to us. The Chinese government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Shortages in availability of foreign currency may then restrict the ability of our Chinese subsidiaries to remit sufficient foreign currency to our offshore entities for our offshore entities to pay dividends or make other payments or otherwise to satisfy our foreign-currency-denominated obligations. Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and foreign debt (which may be denominated in foreign currency or Renminbi), including loans we may secure for our Chinese subsidiaries. Currently, our Chinese subsidiaries may purchase foreign currency for settlement of current account transactions, including payment of dividends to us, without the approval of the State Administration of Foreign Exchange of China (SAFE) by complying with certain procedural requirements. However, the relevant Chinese governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. The Chinese government may continue to strengthen its capital controls, and additional restrictions and substantial vetting processes may be instituted by SAFE for cross-border transactions falling under both the current account and the capital account. Any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of China or pay dividends in foreign currencies to holders of our securities. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant Chinese governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries. See the risk factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020, and the additional risk factors discussed in the “Risk Factors” section in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 and this Quarterly Report on Form 10-Q for a detailed discussion of the Chinese legal restrictions on the payment of dividends and our ability to transfer cash within our group and the potential for our ADS holders and holders of our ordinary shares to be subject to Chinese taxes on dividends paid by us in the event we are deemed a Chinese resident enterprise for Chinese tax purposes.
 
3

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 notes thereto included in our Annual Report on Form
10-K
for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission, or SEC, on March 1, 2021.
 
4

Item 1. Financial Statement
Zai Lab Limited
Unaudited condensed consolidated balance sheets
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
 
           
As of
 
    
Notes
    
September 30,
2021
   
December 31,

2020
 
                     
           
$
   
$
 
Assets
                         
Current assets:
                         
Cash and cash equivalents
     3        1,398,498       442,116  
Short-term investments
     5        170,000       744,676  
Accounts receivable (net of allowance
for credit loss
of $6 and $1 as of September 30, 2021 and December 31, 2020, respectively)
              21,018       5,165  
Inventories
     6        12,494       13,144  
Prepayments and other current assets
              17,077       10,935  
             
 
 
   
 
 
 
Total current assets
              1,619,087       1,216,036  
Restricted cash,
non-current
     4        743       743  
Long
-
term investments
 
(including the fair value measured investment of $20,070 and nil as of September 30, 2021 and December 31, 2020, respectively)
     7        20,801       1,279  
Prepayments for equipment
              1,129       274  
Property and equipment, net
     8        37,087       29,162  
Operating lease right-of-use assets
              15,514       17,701  
Land use rights, net
              7,749       7,908  
Intangible assets, net
              1,678       1,532  
Long-term deposits
              901       862  
Value added tax recoverable
              23,390       22,141  
             
 
 
   
 
 
 
Total assets
           
 
1,728,079
 
 
 
1,297,638
 
             
 
 
   
 
 
 
Liabilities and shareholders’ equity
                         
Current liabilities:
                         
Accounts payable
              51,406       62,641  
Current operating lease liabilities
              6,312       5,206  
Other current liabilities
     11        54,292       30,196  
             
 
 
   
 
 
 
Total current liabilities
              112,010       98,043  
Deferred income
              17,487       16,858  
Non-current
operating lease liabilities
              10,652       13,392  
             
 
 
   
 
 
 
Total liabilities
           
 
140,149
 
 
 
128,293
 
             
 
 
   
 
 
 
Commitments and contingencies (Note 17)
                         
Shareholders’ equity
                         
Ordinary shares (par value of $0.00006 per share; 500,000,000 shares authorized, 95,273,589 and 87,811,026 shares issued and outstanding as of September 30,
 
2021 and December 31, 2020, respectively)
              6       5  
Additional
paid-in
capital
              2,812,830       1,897,467  
Accumulated deficit
              (1,206,249     (713,603
Accumulated other comprehensive loss
              (15,124     (14,524
Treasury Stock (at cost, 27,722 and nil shares as of September 30, 2021 and December 31, 2020, respectively)
              (3,533     —    
             
 
 
   
 
 
 
Total shareholders’ equity
           
 
1,587,930
 
 
 
1,169,345
 
             
 
 
   
 
 
 
Total liabilities and shareholders’ equity
           
 
1,728,079
 
 
 
1,297,638
 
             
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
5

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
    
2021
   
2020
   
2021
   
2020
 
                                 
           
$
   
$
   
$
   
$
 
Revenue
     9        43,103       14,651       100,141       33,864  
Expenses:
           
Cost of sales
       
(12,162
)     (4,934     (30,535     (9,914
Research and development
        (55,144     (58,100     (401,220     (160,149
Selling, general and administrative
        (59,002     (27,874     (149,254     (70,346
     
 
 
   
 
 
   
 
 
   
 
 
 
Loss from operations
        (83,205     (76,257     (480,868     (206,545
Interest income
        713       866       1,171       3,748  
Interest expenses
        —         (43     —         (157
Other (expense
s
) income, net
        (13,580     11,958       (12,401     11,267  
     
 
 
   
 
 
   
 
 
   
 
 
 
Loss before income tax and share of loss from equity method investment
        (96,072     (63,476     (492,098     (191,687
Income tax expense
     10        —         —         —         —    
Share of loss from equity method investment
        (340     (265     (548     (671
     
 
 
   
 
 
   
 
 
   
 
 
 
Net loss
        (96,412     (63,741     (492,646     (192,358
     
 
 
   
 
 
   
 
 
   
 
 
 
Net loss attributable to ordinary shareholders
        (96,412     (63,741     (492,646     (192,358
     
 
 
   
 
 
   
 
 
   
 
 
 
Loss per share - basic and diluted
     12        (1.01     (0.84     (5.34     (2.59
Weighted-average shares used in calculating net loss per ordinary share - basic and diluted
        95,035,432       75,436,646       92,174,838       74,381,115  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
6

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,
 
    
2021
   
2020
   
2021
   
2020
 
                          
    
$
   
$
   
$
   
$
 
Net loss
     (96,412     (63,741     (492,646     (192,358
Other comprehensive income (loss), net of tax of nil:
                                
Foreign currency translation adjustments
     1,741       (9,901     (600     (7,535
    
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive loss
     (94,671     (73,642     (493,246     (199,893
    
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
7

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, 2020
     87,811,026        5        1,897,467       (713,603     (14,524     —         —         1,169,345  
Issuance of ordinary shares upon vesting of restricted shares
     81,600        0        0       —         —         —         —         —    
Exercise of shares option
     58,364        0        702       —         —         —         —         702  
Issuance of ordinary shares in connection with collaboration and license arrangement (Note 15)
     568,182        0        62,250       —         —         —         —         62,250  
Issuance cost adjustment for secondary listing
     —          —          65       —         —         —         —         65  
Share-based compensation
     —          —          7,318       —         —         —         —         7,318  
Net loss
     —          —          —         (232,910     —         —         —         (232,910
Foreign currency translatio
n
     —          —          —         —         2,900       —         —         2,900  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at March 31, 2021
     88,519,172        5        1,967,802       (946,513     (11,624     —         —         1,009,670  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Issuance of ordinary shares upon vesting of restricted shares
     32,100        0        0       —         —         —         —         0  
Exercise of shares option
     490,517        0        3,289       —         —         —         —         3,289  
Issuance of ordinary shares upon
follow-on
public offering, net of issuance cost of $879
     5,716,400        1        817,995       —         —         —         —         817,996  
Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation
     —          —          —         —         —         (6,086     (924     (924
Share-based compensation
     —          —          10,232       —         —         —         —         10,232  
Net loss
     —          —          —         (163,324     —         —         —         (163,324
Foreign currency translation
     —          —          —         —         (5,241     —         —         (5,241
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2021
     94,758,189        6        2,799,318       (1,109,837     (16,865     (6,086     (924     1,671,698  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Issuance of ordinary shares upon vesting of restricted shares
     54,050        0        0       —         —         —         —         0  
Exercise of shares option
     461,350        0        2,916       —         —         —         —         2,916  
Issuance cost adjustment for
follow-on
public offering
     —          —          40       —         —         —         —         40  
Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation
     —          —          —         —         —         (21,636     (2,609     (2,609
Share-based compensation
     —          —          10,556       —         —         —         —         10,556  
Net loss
     —          —          —         (96,412     —         —         —         (96,412
Foreign currency translation
     —          —          —         —         1,741       —         —         1,741  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2021
     95,273,589        6        2,812,830       (1,206,249     (15,124     (27,722     (3,533     1,587,930  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at December 31, 2019
     68,237,247        4        734,734       (444,698     4,620       —         —         294,660  
Issuance of ordinary shares upon vesting of restricted shares
     80,200        0        0       —         —         —         —         —    
Exercise of shares option
     49,278        0        346       —         —         —         —         346  
Issuance of ordinary shares upon
follow-on
public offering, net of issuance cost of $740
     6,300,000        0        280,568       —         —         —         —         280,568  
Share-based compensation
     —          —          6,463       —         —         —         —         6,463  
Net loss
     —          —          —         (47,988     —         —         —         (47,988
Foreign currency translation
     —          —          —         —         3,539       —         —         3,539  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at March 31, 2020
     74,666,725        4        1,022,111       (492,686     8,159       —         —         537,588  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Issuance of ordinary shares upon vesting of restricted shares
     36,000        0        0       —         —         —         —         0  
Exercise of shares option
     179,613        0        2,729       —         —         —         —         2,729  
Issuance cost adjustment for
follow-on
public offering
     —          —          (13     —         —         —         —         (13
Share-based compensation
     —          —          6,964       —         —         —         —         6,964  
Net loss
     —          —          —         (80,629     —         —         —         (80,629
Foreign currency translation
     —          —          —         —         (1,173     —         —         (1,173
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2020
     74,882,338        4        1,031,791       (573,315     6,986       —         —         465,466  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Issuance of ordinary shares upon vesting of restricted shares
     90,468        0        0       —         —         —         —         0  
Exercise of shares option
     560,662        0        1,008       —         —         —         —         1,008  
Issuance of ordinary shares upon secondary listing, net of issuance cost of $5,634
     10,564,050        1        739,232       —         —         —         —         739,233  
Issuance cost adjustment for
follow-on
public offering
     —          —          (2     —         —         —         —         (2
Share-based compensation
     —          —          6,978       —         —         —         —         6,978  
Net loss
     —          —          —         (63,741     —         —         —         (63,741
Foreign currency translation
     —          —          —         —         (9,901     —         —         (9,901
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2020
     86,097,518        5        1,779,007       (637,056     (2,915     —         —         1,139,041  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. “0” in above table means less than 1,000 dollars.
 
8

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,
 
    
2021
   
2020
 
              
    
$
   
$
 
Operating activities
                
Net loss
     (492,646     (192,358
Adjustments to reconcile net loss to net cash used in operating activities:
                
Allowance for doubtful accounts
     5       2  
Inventory write-down
     402       —    
Depreciation and amortization expenses
     4,612       3,253  
Amortization of deferred income
     (234     (234
Share-based compensation
     28,106       20,405  
Noncash research and development expenses (Note 15)
     62,250       —    
Share of loss from equity method investment
     548       671  
Loss from fair value changes of equity investment with readily determinable fair value
     9,930           
Loss on disposal of property and equipment
     12       1  
Noncash lease expenses
     4,595       3,251  
Changes in operating assets and liabilities:
              
Accounts receivable
     (15,858     (3,704
Inventories
     248       (3,631
Prepayments and other current assets
     (6,142     (3,564
Long
-
term deposits
     (39     (474
Value added tax recoverable
     (1,249     (6,845
Accounts payable
     (11,235     5,217  
Other current liabilities
     23,429       (4,981
Operating lease liabilities
     (3,834     (2,335
Deferred income
     863       13,606  
    
 
 
   
 
 
 
Net cash used in operating activities
     (396,237     (171,720
    
 
 
   
 
 
 
Cash flows from investing activities:
                
Purchases of short-term investments
     (170,000     (749,676
Proceeds from maturity of short-term investment
     743,902       —    
Payment for investment in equity investee
     (30,000     —    
Disposal of property and equipment
     3       —    
Purchase of property and equipment
     (11,920     (4,835
Purchase of intangible assets
     (539     (370
    
 
 
   
 
 
 
Net cash provided by (used in) investing activities
     531,446       (754,881
    
 
 
   
 
 
 
Cash flows from financing activities:
                
Repayment of short-term borrowings
     —         (4,292
Proceeds from exercises of stock options
     6,907       4,083  
Proceeds from issuance of ordinary shares upon public offerings
     818,874       1,025,970  
Payment of public offering costs
     (1,836     (1,275
Employee taxes paid related to net share settlement of equity awards
     (3,467     —    
    
 
 
   
 
 
 
Net cash provided by financing activities
     820,478       1,024,486  
    
 
 
   
 
 
 
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
     695       2,062  
    
 
 
   
 
 
 
Net increase in cash, cash equivalents and restricted cash
     956,382       99,947  
Cash, cash equivalents and restricted cash - beginning of period
     442,859       76,442  
    
 
 
   
 
 
 
Cash, cash equivalents and restricted cash - end of period
     1,399,241       176,389  
    
 
 
   
 
 
 
Supplemental disclosure on
non-cash
investing and financing activities:
                
Payables for purchase of property and equipment
     1,797       2,334  
Payables for intangible assets
     24       21  
Payables for public offering costs
     —         4,909  
Supplemental disclosure of cash flow information:
                
Cash and cash equivalents
     1,398,498       175,879  
Restricted cash,
non-current
     743       510  
    
 
 
   
 
 
 
Total cash and cash equivalents and restricted cash
     1,399,241       176,389  
    
 
 
   
 
 
 
Interest paid
     —         157  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
9

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
1. Organization and principal activities
Zai Lab Limited (the “Company”) was incorporated on March 28, 2013 in the Cayman Islands as an exempted company with limited liability under the Companies Law of the Cayman Islands. The Company and its subsidiaries (collectively referred to as the “Group”) are focused on developing and commercializing therapies that address medical conditions with unmet medical needs including, in particular, oncology, autoimmune disorders and infectious diseases.
The Group’s principal operations and geographic markets are in mainland China (hereinafter referred to as “China”), Hong Kong, Macau and Taiwan (hereinafter collectively referred to as “Greater China”). The Group has a substantial presence in Greater China and the United States.
2. Basis of presentation and consolidation and significant accounting policies
(a) Basis of presentation
The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form
10-Q
and Article 10 of Regulation
S-X.
Accordingly, they do not include all information and disclosures necessary for a presentation of the Company’s financial position, results of operations, shareholders’ equity and cash flows in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). In the opinion of management, these financial statements reflect all normal recurring adjustments and accruals necessary for a fair statement of the Company’s unaudited condensed consolidated financial statements for such periods. The results of operations for any interim period are not necessarily indicative of the results for the full year. The December 31, 2020 condensed consolidated balance sheets data were derived from audited financial statements, but do not include all disclosures required by U.S. GAAP. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2020. Interim results are not necessarily indicative of full year results and the unaudited condensed consolidated financial statements may not be indicative of the
Group’s
future performance.
(b) Principles of consolidation
The unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All intercompany transactions and balances among the Company and its subsidiaries are eliminated upon consolidation.
(c) Use of estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the period. Areas where management uses subjective judgment include, but are not limited to, estimating the useful lives of long-lived assets, estimating the current expected credit losses for financial assets, assessing the impairment of long-lived assets, discount rate of operating lease liabilities, accrual of rebate, allocation of the research and development service expenses to the appropriate financial reporting period based on the progress of the research and development projects, share-based compensation expenses, recoverability of deferred tax assets and a lack of marketability discount of the ordinary shares issued in connection with collaboration and license arrangement (Note 15). Management bases the estimates on historical experience and various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates.
(d)
Long-term
investments
Long-term investments represent equity-method investments and equity investments with readily determinable fair values.
The Group accounts for equity investment in entities with significant influence under equity-method accounting. Under this method, the Group’s pro rata share of income (loss) from investment is recognized in the consolidated statements of comprehensive income. Dividends received reduce the carrying amount of the investment. When the Group’s share of loss in an equity-method investee equals or exceeds its carrying value of the investment in that entity, the Group continues to report its share of equity method losses in the statements of comprehensive income to the extent and as an adjustment to the carrying amount of its other investments in the investee. Equity-method investment is reviewed for impairment by assessing if the decline in market value of the investment below the carrying value is other-than-temporary. In making this determination, factors are evaluated in determining whether a loss in value should be recognized. These include consideration of the intent and ability of the Group to hold investment and the ability of the investee to sustain an earnings capacity, justifying the carrying amount of the investment. Impairment losses are recognized in other expense when a decline in value is deemed to be other-than-temporary.
Investments in equity securities that have readily determinable fair values (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are measured at fair value, with unrealized gains and losses from fair value changes recognized in other (expenses) income, net in the unaudited condensed consolidated statements of operations.
 
10

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
(e) Fair value measurements
The Group applies ASC topic 820 (“ASC 820”), Fair Value Measurements and Disclosures, in measuring fair value. ASC 820 defines fair value, establishes a framework for measuring fair value and requires disclosures to be provided on fair value measurement.
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.
The Group did not have any assets or liabilities that were measured at fair value on a recurring basis prior to 2021. As of September 30, 2021, information about inputs into the fair value measurement of the Group’s assets that are measured at a fair value on a recurring basis in periods subsequent to their initial recognition is as follows:
 
Description
  
Fair Value as of
September 30, 2021
US$
    
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
     20,070        20,070  
Financial instruments of the Group primarily include cash, cash equivalents and restricted cash, short-term investments, accounts receivable, prepayments and other current assets, long-term investments, accounts payable and other current
liabilities
.
 
As of September 30, 2021 and December 31, 2020, the carrying values of cash and cash equivalents, short-term investments, accounts receivable, prepayments and other current assets, accounts payable and other payable approximated their fair values due to the short-term maturity of these instruments, and the carrying value of restricted cash approximates its fair value based on the nature of the assessment of the ability to recover these amounts.
 
11

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
(f) Recent accounting pronouncements
Adopted Accounting Standards
In December 2019, the Financial Accounting Standard Board (“FASB”) issued ASU
2019-12,
Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes
. This update simplifies the accounting for income taxes as part of the FASB’s overall initiative to reduce complexity in accounting standards. The amendments include removal of certain exceptions to the general principles of ASC 740,
Income taxes
, and simplification in several other areas such as accounting for a franchise tax (or similar tax) that is partially based on income. The update is effective in fiscal years beginning after December 15, 2020, and interim periods therein, and early adoption is permitted. Certain amendments in this update should be applied retrospectively or modified retrospectively, all other amendments should be applied prospectively. The Group adopted this standard on January 1, 2021. There was no material impact to the Group’s financial position or results of operations upon adoption.
(g) Significant accounting policies
For a more complete discussion of the Company’s significant accounting policies and other information, the unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2020.
 
12

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
3. Cash and cash equivalents
 
    
As of
 
        
    
September 30, 2021
    
December 31, 2020
 
               
    
$
    
$
 
Cash at bank and in hand
     1,097,430        441,283  
Cash equivalents (note (i))
     301,068        833  
    
 
 
    
 
 
 
       1,398,498        442,116  
    
 
 
    
 
 
 
Denominated in:
                 
US$
     762,209        297,813  
RMB (note (ii))
     28,802        23,898  
Hong Kong dollar (“HK$”)
     607,323        119,695  
Australian dollar (“A$”)
     134        710  
Taiwan dollar (“TW$”)
     30        —    
    
 
 
    
 
 
 
       1,398,498        442,116  
    
 
 
    
 
 
 
Note
s
:
 
(i)
Cash equivalents represent short-term and highly liquid investments in a money market fund.
 
(ii)
Certain cash and bank balances denominated in RMB were deposited with banks in China. The conversion of these RMB denominated balances into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by the government of the People’s Republic of China (“PRC”).
4. Restricted cash,
non-current
The Group’s restricted cash balance of $743 and $743 as of September 30, 2021 and December 31, 2020, respectively, was long-term bank deposits held as collateral for issuance of letters of credit. These deposits will be released when the related letters of credit are settled by the Group.
5. Short-term investments
Short-term investments are primarily comprised of time deposits with original maturities between three months and one year.
The Group’s short-term investments consisted entirely of short-term held to maturity debt instruments with high credit ratings, which were determined to have remote risk of expected credit loss. Accordingly, no allowance for credit loss was recorded as of September 30, 2021 and December 31, 2020, respectively.
 
13

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
6. Inventories
The Group’s inventory balance of $12,494 and $13,144 as of September 30, 2021 and December 31, 2020, respectively, mainly consisted of finished goods purchased from Tesaro Inc., now GlaxoSmithKline (GSK), for distribution in Hong Kong, and from NovoCure Limited (“NovoCure”) and Deciphera Pharmaceuticals, LLC (“Deciphera”) for distribution in Hong Kong and China, as well as finished goods and certain raw materials for ZEJULA commercialization in China.
 
    
As of
 
        
    
September

30, 2021
    
December

31, 2020
 
               
    
$
    
$
 
Finished goods
     5,298        3,041  
Raw materials
     7,196        10,103  
    
 
 
    
 
 
 
Inventories
     12,494        13,144  
    
 
 
    
 
 
 
The Group writes down inventory for any excess or obsolete inventories or when the Group believes that the net realizable value of inventories is less than the carrying value. During the three and nine months ended September 30, 2021, the Group recorded write-downs of
$112 and $402,
in cost of revenues, respectively. During the three and nine months ended September 30, 2020, the Group recorded reverses and write-downs of
$7 and nil,
in cost of revenues, respectively.
7. Long-term investments
In June 2017, the Group entered into an agreement with three
third-parties
to launch JING Medicine Technology (Shanghai) Ltd. (“JING”), an entity which provides services for product discovery and development, consultation and transfer of pharmaceutical technology. The capital contribution by the Group was RMB26,250 in cash, which was paid by the Group in 2017 and 2018, representing 20% and 18% of the equity interest of JING as of December 31, 2020 and September 30, 2021 respectively. The Group accounts for this investment using the equity method of accounting due to the fact that the Group can exercise significant influence on the investee. The Group recorded its gain on deemed disposal in this investee of nil and $463 for the three months and nine months ended September 30, 2021, and recorded loss of $340 and $1,011 for its portion of JING’s net loss for the three months and nine months ended September 30, 2021, respectively. The Group recorded share of loss in this investee of $265 and $671 for the three and nine months ended September 30, 2020, respectively.
In July 2021, the Group made an equity investment in MacroGenics Inc. (“MacroGenics”), a biopharmaceutical company focused on developing and commercializing innovative monoclonal antibody-based therapeutics for the treatment of cancer, in a private placement with total contributions of
$30,000 and obtained 958,467 newly issued common shares of MacroGenics at $31.30
per share (see Note 15). The Group recorded this investment at acquisition cost and subsequently measured at fair value, with the changes in fair value recognized in the statement of operations. The Group recognized its fair value loss of
$9,930
and $9,930 for the three and nine months ended September 30, 2021.
 
14

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
8. Property and equipment, net
Property and equipment consist of the following:
 
    
As of
 
        
    
September 30,
2021
    
December 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  
    
 
 
    
 
 
 
       51,592        39,414  
Less: accumulated depreciation
     (14,505      (10,252
    
 
 
    
 
 
 
Property and equipment, net
     37,087        29,162  
    
 
 
    
 
 
 
Depreciation expenses for the three and nine months ended September 30, 2021 were $1,510 and $4,257, respectively. Depreciation expenses for the three and nine months ended September 30, 2020 were $1,061 and $3,035, respectively.
9. Revenue
The Group’s revenue is primarily derived from the sale of ZEJULA, Optune and QINLOCK in China and Hong Kong. The table below presents the Group’s net product sales for the three and nine months ended September 30, 2021 and 2020.
 
    
Three Months Ended September 30,
    
Nine Months Ended September 30,
 
               
    
2021
    
2020
    
2021
    
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  
    
 
 
    
 
 
    
 
 
    
 
 
 
Sales rebates are offered to distributors in 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.
The sales rebates included nil and $22,009 compensation to distributors for those products previously sold at the price prior to the National Reimbursement Drug List (“NRDL”) implementation, due to the first-time inclusion of ZEJULA in the NRDL, for the three and nine months ended September 30, 2021. There was no such compensation for the three and nine months ended September 30, 2020.
The following table disaggregates net revenue by product for the three and nine months ended September 30, 2021 and 2020:
 
    
Three Months Ended September 30,
    
Nine Months Ended September 30,
 
               
    
2021
    
2020
    
2021
    
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  
    
 
 
    
 
 
    
 
 
    
 
 
 
Product revenue - net
     43,103        14,651        100,141        33,864  
    
 
 
    
 
 
    
 
 
    
 
 
 
10. Income Tax
No provision for income taxes has been required to be accrued because the Company and all of its subsidiaries are in cumulative loss positions for all the periods presented.
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, 2021 and December 31, 2020. No unrecognized tax benefits and related interest and penalties were recorded in any of the periods presented.
 
15

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
11. Other current liabilities
Other current liabilities consist of the following:
 
    
As of
 
    
September 30,
2021
    
December 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 (note (i))
     8,170        4,567  
    
 
 
    
 
 
 
Total
     54,292        30,196  
    
 
 
    
 
 
 
Note:
 
(i)
Others are mainly payables to employees for exercising the share-based compensations, payables related to travel and business entertainment expenses.
12. Loss per share
Basic and diluted net loss per share for each of the period presented are calculated as follows:
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
 
    
2021
    
2020
    
2021
    
2020
 
                             
    
$
    
$
    
$
    
$
 
Numerator:
                                   
Net loss attributable to ordinary shareholders
     (96,412      (63,741      (492,646      (192,358
Denominator:
                                   
Weighted average number of ordinary shares- basic and diluted
     95,035,432        75,436,646        92,174,838        74,381,115  
    
 
 
    
 
 
    
 
 
    
 
 
 
Net loss per share - basic and diluted
     (1.01      (0.84      (5.34      (2.59
    
 
 
    
 
 
    
 
 
    
 
 
 
As a result of the Group’s net loss for the nine months ended September 30, 2021 and 2020, share options and
non-vested
restricted shares outstanding in the respective periods were excluded from the calculation of diluted loss per share as their inclusion would have been anti-dilutive.
 
    
As of
 
    
September 30,

2021
    
September 30,

2020
 
               
Share options
     8,180,157        9,093,582  
Non-vested
restricted shares
     636,619        597,850  
 
16

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
13. Related party transactions
The table below sets forth the major related party and the relationship with the Group as of September 30, 2021:
 
Company Name
  
Relationship with the Group
MEDx (Suzhou) Translational Medicine Co., Ltd.    Significant influence held by Samantha Du’s (Director, Chairwoman and Chief Executive Officer of the Company) immediate family
For the three and nine months ended September 30, 2021, the Group incurred $96 and $303
in
research and development expense with MEDx (Suzhou) Translational Medicine Co., Ltd. for product research and development services, respectively. The Group incurred $233 and $417
in research and development expense for the three and nine months ended September 30, 2020, respectively. All of the transactions are carried out with normal business terms and are on arms’ length basis.
14. Share-based compensation
Share options
On March 5, 2015, the Board of Directors of the Company approved an Equity Incentive Plan (the “2015 Plan”) which is administered by the Board of Directors. Under the 2015 Plan, the Board of Directors may grant options to purchase ordinary shares to management including officers, directors, employees and individual advisors who render services to the Group to purchase an aggregate of no more than 4,140,945 ordinary shares of the Group (“Option Pool”). Subsequently, the Board of Directors approved the increase in the Option Pool to 7,369,767 ordinary shares.
In connection with the completion of the initial public offering (the “IPO”), the Board of Directors approved the 2017 Equity Incentive Plan (the “2017 Plan”) and all equity-based awards subsequent to the IPO would be granted under the 2017 Plan.
For the nine months ended September 30, 2020, the Group granted 1,059,431 share options to certain management, employees and individual advisors of the Group at the exercise price ranging from $44.94 to $82.50 per share under the 2017 Plan. These options granted have a contractual term of ten years and generally vest over a five- or three-year period, with 20% or 33.3% of the awards vesting beginning on the anniversary date one year after the grant date.
For the nine months ended September 30, 2021, the Group granted 553,198 share options to certain management and employees of the Group at the exercise price ranging from $130.96 to $180.00 per share under the 2017 Plan. These options granted have a contractual term of ten years and generally vest over a five-year period, with 20% of the awards vesting beginning on the anniversary date one year after the grant date.
The weighted-average grant-date fair value of the options granted in the nine months ended September 30, 2021 and 2020 were $82.21and $34.91 per share, respectively. The Group recorded compensation expense related to the options of $ 19,951 and $ 15,718 for the nine months ended September 30, 2021 and 2020, respectively, which were classified in the accompanying unaudited condensed consolidated statements of operations as follows:
 
    
Three Months Ended September 30,
    
Nine Months Ended September 30,
 
    
2021
    
2020
    
2021
    
2020
 
                             
    
$
    
$
    
$
    
$
 
Selling, general and administrative
     4,119        2,952        11,501        8,500  
Research and development
     3,056        2,411        8,450        7,218  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
     7,175        5,363        19,951        15,718  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
17

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
As of September 30, 2021, there was $ 93,248 of total unrecognized compensation expense related to unvested share options granted. That cost is expected to be recognized over a weighted-average period of 1.39 years which is determined based on the number of shares and unrecognized years.
Non-vested restricted shares
For the nine months ended September 30, 2020, 50,000 ordinary shares were authorized for grant to the independent directors. The restricted shares will vest and be released from the restrictions in full on the first anniversary from the date of the agreement. Upon termination of the independent directors’ service with the Group for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
For the nine months ended September 30, 2020, 71,250 ordinary shares were authorized for grant to certain management. One fifth of the restricted shares will vest and be released from the restrictions on each yearly anniversary from the date of the agreement. Upon termination of the certain management’s service with the Group for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
For the nine months ended September 30, 2021, 19,260 ordinary shares were authorized for grant to the independent directors. The restricted shares will vest and be released from the restrictions in full on the first anniversary from the date of the agreement. Upon termination of the independent directors’ service with the Group for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
For the nine months ended September 30, 2021, 271,509 ordinary shares were authorized for grant to certain management. One fifth of the restricted shares will vest and be released from the restrictions on each yearly anniversary from the date of the agreement. Upon termination of the certain management’s service with the Group for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
The Group measured the fair value of the
non-vested
restricted shares as of respective grant dates and recognized the amount as compensation expense over the deemed service period using a graded vesting attribution model on a straight-line basis.
As of September 30, 2021, there was $46,885 of total unrecognized compensation expense related to
non-vested
restricted shares. The Group recorded compensation expense related to the restricted shares of $8,155 and $4,687 for the nine months ended September 30, 2021 and 2020, respectively, which were classified in the accompanying unaudited condensed consolidated statements of operations as follows:
 
    
Three Months Ended September 30,
    
Nine Months Ended September 30,
 
    
2021
    
2020
    
2021
    
2020
 
                             
    
$
    
$
    
$
    
$
 
Selling, general and administrative
     2,028        1,065        5,078        3,179  
Research and development
     1,353        550        3,077        1,508  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
     3,381        1,615        8,155        4,687  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
18

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
15. Licenses and collaborative arrangement
The following is a description of the Group’s significant ongoing collaboration agreements for the three and nine months ended September 30, 2021.
License and collaboration agreement with GSK
In September 2016, the Group entered into a collaboration, development and license agreement with Tesaro, Inc, a company later acquired by GSK, pursuant to which it obtained an exclusive sublicense under certain patents and
know-how
of GSK (including such patents and
know-how
licensed from Merck, Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc., and AstraZeneca UK Limited) to develop, manufacture and commercialize GSK’s proprietary PARP inhibitor, niraparib, in China, Hong Kong and Macau for the diagnosis and prevention of any human diseases or conditions (other than prostate cancer). The Group also obtained the right of first negotiation to obtain a license to develop and commercialize certain
follow-on
compounds of niraparib being developed by GSK in the licensed territory. Under the agreement, the Group agreed not to research, develop or commercialize certain competing products, and the Group also granted GSK the right of first refusal to license certain immuno-oncology assets developed by us. In February 2018, the Group entered into an amendment with GSK that eliminated GSK’s option to
co-market
niraparib in the licensed territory.
Under the terms of the agreement, the Group made an upfront payment of $15,000 and one milestone payment of $1,000, and accrued one development milestone payment of $3,500 to GSK. On top of those, if the Group achieves other specified regulatory, development and commercialization milestones, the Group may be additionally required to pay further milestone payments up to $36,000 to GSK. In addition, if the Group successfully develops and commercializes the licensed products, the Group will pay GSK tiered royalties on the net sales of the licensed products, until the later of the expiration of the
last-to-expire
licensed patent covering the licensed product, the expiration of regulatory exclusivity for the licensed product, or the tenth anniversary of the first commercial sale of the licensed product, in each case on a
product-by-product
and
region-by-region
basis.
The Group has the right to terminate this agreement at any time by providing written notice of termination.
License and collaboration agreements with MacroGenics
In November 2018, the Group entered into a collaboration agreement with MacroGenics, pursuant to which it obtained an exclusive license under certain patents and
know-how
of MacroGenics to develop and commercialize margetuximab, tebotelimab
(MGD-013)
and an undisclosed multi-specific TRIDENT molecule in
pre-clinical
development, each as an active ingredient in all human fields of use, except to the extent limited by any applicable third party agreement of MacroGenics in Greater China.
Under the terms of the agreement, the Group paid an upfront license fee of $25,000 and two milestone payments in total of $4,000 to MacroGenics. The Group also agreed to pay certain development and regulatory-based milestone payments up to an aggregate of $136,000, and tiered royalties at percentage rates for net sales of Margetuximab, tebotelimab and TRIDENT molecule in the territory.
The Group has the right to terminate this agreement at any time by providing written notice of termination to MacroGenics.
In June 2021, the Group entered into a collaboration and license agreement with MacroGenics, pursuant to which the Group and MacroGenics made four collaboration programs involving up to four immuno-oncology molecules. The first collaboration program covers a lead research molecule that incorporates MacroGenics’ DART platform and binds CD3 and an undisclosed target that is expressed in multiple solid tumors. The second collaboration program will cover a target to be designated by MacroGenics. For both molecules, the Group received commercial rights in Greater China, Japan, and Korea and MacroGenics received commercial rights in all other territories. For the lead molecule, the Group receives an option upon reaching a predefined clinical milestone to convert the regional arrangement into a global 50/50 profit share. The Group also obtained exclusive, global licenses from MacroGenics to develop, manufacture and commercialize two additional molecules. For these four programs, each company will contribute intellectual property to generate either
CD3-
or CD47-based bispecific antibodies.
Under the terms of the agreement, the Group paid an upfront payment of $25,000 to MacroGenics. In addition, MacroGenics is also eligible to receive up to $1,386,000 in potential development, regulatory and commercial milestone payments for the four programs. If products from the collaboration are commercialized, MacroGenics would also receive royalties on annual net sales in the Group’s territories.
 
19

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
Pursuant to the collaboration and license agreement, the Group also made an equity investment of $30,000 in MacroGenics’ common stock at $31.30 per share
 in
J
uly 2021
(see Note 7).
The Group has the right to terminate this agreement at any time by providing written notice of termination to MacroGenics.
 
20

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
License and collaboration agreement with Deciphera
In June 2019, the Group entered into a license agreement with Deciphera, pursuant to which it obtained an exclusive license under certain patents and
know-how
of Deciphera to develop and commercialize products containing ripretinib in the field of the prevention, prophylaxis, treatment, cure or amelioration of any disease or medical condition in humans in Greater China.
Under the terms of the agreement, the Group paid Deciphera an upfront license fee of $20,000 and three milestone payments of $12,000. The Group also agreed to pay certain additional development, regulatory and commercial milestone payments up to an aggregate of $173,000, and certain tiered royalties (from
low-to-high
teens on a percentage basis and subject to certain reductions) based on the net sales of the licensed products in the territory.
The Group has the right to terminate this agreement at any time by providing written notice of termination to Deciphera.
License agreements with Turning Point Therapeutics Inc (“Turning Point”)
In July 2020, the Group entered into an exclusive license agreement with Turning Point pursuant to which Turning Point exclusively licensed to the Group the rights to develop and commercialize products containing repotrectinib as an active ingredient in all human therapeutic indications, in Greater China.
Under the terms of the agreements, the Group paid an upfront payment of $25,000 and one milestone payment of $2,000, and accrued two milestone payments totaling $3,000 to Turning Point. Turning Point is also eligible to receive up to $146,000 in development, regulatory and sales milestones. Turning Point will also be eligible to receive certain tiered royalties (from
mid-to-high
teens on a percentage basis and subject to certain reductions) based on annual net sales of repotrectinib in Greater China.
The Group has the right to terminate this agreement at any time by providing written notice of termination to Turning Point.
In January 2021, the Group entered into a license agreement with Turning Point, which expanded their collaboration. Under the terms of the new agreement, the Group obtained exclusive rights to develop and commercialize
TPX-0022,
Turning Point’s MET, SRC and CSF1R inhibitor, in Greater China.
The Group paid an upfront license fee in the amount of $25,000 to Turning Point. The Group also agreed to pay certain development, regulatory and commercial milestone payments up to an aggregate of $336,000. Turning Point will also be eligible to receive certain tiered royalties (from
mid-teens
to
low-twenties
on a percentage basis and subject to certain reductions) based on annual net sales of
TPX-0022
in Greater China. In addition, Turning Point will have the right of first negotiation to develop and commercialize an oncology product candidate discovered by the Group.
License and collaboration agreement with Five Prime Therapeutics, Inc. (“Five Prime”)
In December 2017, the Group entered into a license and collaboration agreement with Five Prime (a company later acquired by Amgen Inc.), pursuant to which it obtained an exclusive license under certain patents and
know-how
of Five Prime to develop and commercialize products containing Five Prime’s proprietary afucosylated FGFR2b antibody known as bemarituzumab (FPA144) as an active ingredient in the treatment or prevention of any disease or condition in humans in Greater China.
Under the terms of the agreement, the Group made an upfront payment of $5,000 and a milestone payment of $2,000 to Five Prime. Additionally, the Group also agreed to pay further development and regulatory milestone payments of up to an aggregate of $37,000 to Five Prime and certain tiered royalties (from high-teens to
low-twenties
on a percentage basis and subject to certain reductions) based on the number of patients the Group enrolls in the bemarituzumab study.
The Group has the right to terminate this agreement at any time by providing written notice of termination to Five Prime.
 
21

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
License agreement with Cullinan Pearl Corp. (“Cullinan”)
In December 2020, the Group entered into a license agreement with Cullinan, a subsidiary of Cullinan Management, Inc., formerly Cullinan Oncology, LLC, pursuant to which it obtained an exclusive license under certain patents and
know-how
of Cullinan to develop, manufacture and commercialize products containing
CLN-081
as an active ingredient in all uses in humans and animals in Greater China.
Under the terms of the agreement, the Group paid an upfront payment of $20,000 to Cullinan. Cullinan is also eligible to receive up to $211,000 in development, regulatory and sales-based milestone payments. Cullinan is also eligible to receive certain tiered royalties (from high-single-digit to
low-teen
tiered royalties on a percentage basis and subject to certain reductions) based on annual net sales of
CLN-081
in Greater China.
The Group has the right to terminate this agreement at any time by providing written notice of termination to Cullinan.
License agreement with Takeda Pharmaceutical Company Limited (“Takeda”)
In December 2020, the Group entered into an exclusive license agreement with Takeda. Under the terms of the license agreement, Takeda exclusively licensed to the Group the right to exploit products in the licensed field during the term.
Under the terms of the agreement, the Group paid an upfront payment of $6,000 to Takeda. Takeda is also eligible to receive up to $481,500 in development, regulatory and sales-based milestone payments. Takeda is also eligible to receive certain tiered royalties (from high-single-digit to
low-teen
tiered royalties on a percentage basis and subject to certain reductions) based on net sales of each product sold by selling party during each year of the applicable royalty term.
The Group has the right to terminate this agreement at any time by providing written notice of termination to Takeda.
Collaboration and license agreement with argenx BV (“argenx”)
In January 2021, the Group entered into a collaboration and license agreement with argenx. The Group received an exclusive license to develop and commercialize products containing argenx’s proprietary antibody fragment, known as efgartigimod, in Greater China. The Group is responsible for the development of the licensed compound and licensed product and will have the right to commercialize such licensed product in the territory.
Pursuant to the collaboration and license agreement, a share issuance agreement was entered into between the Group and argenx. As the upfront payment to argenx, the Group issued 568,182 ordinary shares of the Company to argenx with par value $0.00006 per share on the closing date of January 13, 2021. In determining the fair value of the ordinary shares at closing, the Company considered the closing price of the ordinary shares on the closing date and included a lack of marketability discount because the shares are subject to certain restrictions. The fair value of the shares on the closing date was determined to be $62,250 in the aggregate. The Group recorded this upfront payment in research and development expenses.
In addition, the Group made a
non-creditable,
non-refundable
development cost-sharing payment of $75,000 to argenx. Argenx is also eligible to receive a cash payment of $25,000 upon the first regulatory approval of a licensed product by the U.S. Food and Drug Administration for myasthenia gravis and tiered royalties (from
mid-teen
to
low-twenties
on a percentage basis and subject to certain reductions) based on annual net sales of all licensed product in the territory.
Collaboration and license agreement with Mirati Therapeutics, Inc. (“Mirati”)
In May 2021, the Group entered into a collaboration and license agreement with Mirati. The Group obtained the right to research, develop, manufacture and exclusively commercialize adagrasib in Greater China. The Group will support accelerated enrollment in key global, registration-enabling clinical trials of adagrasib in patients with cancer who have a KRASG12C mutation. Mirati has an option to
co-commercialize
in Greater China and retains full and exclusive rights to adagrasib in all countries outside of Greater China.
 
22

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
Under the terms of the agreement, the Group paid an upfront payment of $65,000 to Mirati. Mirati is also eligible to receive up to $273,000 in development, regulatory and sales-based milestone payments. Mirati is also eligible to receive high-teen- to
low-twenties-percent
tiered royalties based on annual net sales of adagrasib in Greater China.
The Group has the right to terminate this agreement at any time by providing written notice of termination to Mirati.
 
23

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
Collaboration and license agreement with Schrödinger, Inc. (“Schrödinger”)