Zai Lab Ltd - Quarter Report: 2021 September (Form 10-Q)

 

 

 

FORM

 

 

For the transition period from to

Commission File Number:

 

 

 

 

 

 

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  ☐

S-T

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.

 

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. ☐

12b-2

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.

 

 

 

Quarterly Report on Form

 

Forward-Looking Statements

10-Q

10-Q,

10-Q.

Usage of Terms

10-Q

10-Q

Disclosures Relating to Our Chinese Operations

10-K

 

1

10-Q,

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.

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 Fomnone 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

after-tax

after-tax

after-tax

after-tax

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.

 

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9

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.

10-Q

S-X.

10-K

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.

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.

 

 

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:

 

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

.

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.

 

 

2019-12,

10-K

 

 

 

Note:

 

 

4. Restricted cash,

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.

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.

 

 

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.

 

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.

third-parties

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.

 

 

Property and equipment consist of the following:

 

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.

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.

 

The following table disaggregates net revenue by product for the three and nine months ended September 30, 2021 and 2020:

 

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.

 

 

Other current liabilities consist of the following:

 

Note:

 

Basic and diluted net loss per share for each of the period presented are calculated as follows: