zlab-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

____________________

FORM 10-Q

____________________

(Mark One)


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023


o			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 Shanghai China			201210
314 Main Street 4th Floor, Suite 100 Cambridge, MA, USA			02142
(Address of Principal Executive Offices)			(Zip Code)

+86 216163 2588

+1 857 706 2604

(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 10 Ordinary Shares, par value $0.000006 per share

ZLAB

The Nasdaq Global Market

Ordinary Shares, par value $0.000006 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 May 3, 2023, 979,087,430 ordinary shares of the registrant, par value $0.000006 per share, were outstanding, of which 743,576,320 ordinary shares were held in the form of American Depositary Shares.

Table of Contents

Zai Lab Limited

Quarterly Report on Form 10-Q

For the First Quarter of 2023


		Page
PART I.	FINANCIAL INFORMATION	2
Item 1.	Financial Statements (Unaudited)	2
	Condensed Consolidated Balance Sheets as of March 31, 202 3 and December 31, 20 2 2	2
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2023 and 2022	3
	Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2023 and 2022	4
	Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2023 and 2022	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	26
PART II.	OTHER INFORMATION	27
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults upon Senior Securities	27
Item 4.	Mine Safety Disclosures	27
Item 5.	Other Information	27
Item 6.	Exhibits	28
Signatures		29

SPECIAL NOTES REGARDING THE COMPANY

Forward-Looking Statements

This report 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,” “potential,” “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 or guarantees or assurances of future performance. These forward-looking statements relate to our future plans, objectives, expectations, intentions, and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to inherent uncertainties, risks, and changes in circumstances that may differ materially from those contemplated by the forward-looking statements because they relate to events and depend on circumstances that may or may not occur in the future. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including but not limited to the following:

• The effects of the COVID-19 pandemic, particularly in mainland China where our operations and product markets are primarily located;

• Changes in United States and China trade policies and relations, as well as relations with other countries, and/or changes in regulations and/or sanctions;

• Actions the Chinese government may take to intervene in or influence our operations;

• Economic, political, and social conditions in mainland China, as well as governmental policies;

• Uncertainties in the Chinese legal system, including with respect to the Counter-Espionage Law, the Data Security Law, the Cyber Security Law, the Cybersecurity Review Measures, the Personal Information Protection Law, the Regulation on the Administration of Human Genetic Resources, the Biosecurity Law, the Measures on Security Assessment of Cross-Border Data Transfer (the “Security Assessment Measures”), and other future laws and regulations or amendments to such laws and regulations;

• Approval, filing, or procedural requirements imposed by the China Securities Regulatory Commission (“CSRC”) or other Chinese regulatory authorities in connection with issuing securities to foreign investors under Chinese law;

• Any violation or liability under the U.S. Foreign Corrupt Practices Act (“FCPA”) or Chinese anti-corruption laws;

• Restrictions on currency exchange;

• Limitations on the ability of our Chinese subsidiaries to make payments to us;

• Chinese requirements on the ability of residents in mainland China to establish offshore special purpose companies by residents in mainland China;

• Chinese regulations regarding acquisitions of companies based in mainland China by foreign investors;

• Any issues that our Chinese manufacturing facilities may have with operating in conformity with established Good Manufacturing Practices (“GMPs”) and international best practices, and with passing U.S. Food and Drug Administration (“FDA”), China National Medical Products Administration (“NMPA”), and European Medicines Agency inspections;

• Expiration of, or changes to, financial incentives or discretionary policies granted by local governments in mainland China;

• Restrictions or limitations on the ability of overseas regulators to conduct investigations or collect evidence within mainland China;

• Unfavorable tax consequences to us and our non-Chinese shareholders or ADS holders if we were to be classified as a Chinese resident enterprise for Chinese income tax purposes;

• Failure to comply with applicable Chinese, U.S., and Hong Kong regulations that could lead to government enforcement actions, fines, other legal or administrative sanctions, and/or harm to our business or reputation;

• Review by the U.S. Committee on Foreign Investment (“CFIUS”) in our investments or other delays or obstacles for closing transactions;

• Any inability to renew our current leases on desirable terms or otherwise locate desirable alternatives for our leased properties;

• Our ability to generate revenues from our approved commercial products;

• Any inability of third parties on whom we rely to conduct our pre-clinical and clinical trials to successfully carry out their contractual duties or meet expected deadlines; and

• Any inability to obtain or maintain sufficient patent protection for our products and product candidates.

These factors should not be construed as exhaustive and should be read with the other cautionary statements and information in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission (“SEC”) on March 1, 2023 (the “2022 Annual Report”) and in this report. Forward-looking statements are based on our management’s beliefs and assumptions and information currently available to our management. These statements, like all statements in this report, 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 report.

Usage of Terms

Unless the context requires otherwise, references in this report to “Greater China” refer to mainland China, Hong Kong Special Administrative Region (“Hong Kong” or “HK”), Macau Special Administrative Region (“Macau”), and Taiwan, collectively; references to “Zai Lab,” the “Company,” “we,” “us,” and “our” refer to Zai Lab Limited, a holding company, and its subsidiaries, on a consolidated basis; and references to “Zai Lab Limited” refer to Zai Lab Limited, a holding company. Zai Lab Limited is the entity in which investors hold their interest.

Our operating subsidiaries consist of Zai Lab (Hong Kong) Limited, domiciled in Hong Kong; Zai Auto Immune (Hong Kong) Limited, domiciled in Hong Kong; Zai Anti Infectives (Hong Kong) Limited, domiciled in Hong Kong; Zai Lab (Shanghai) Co., Ltd., domiciled in mainland China; Zai Lab International Trading (Shanghai) Co., Ltd., domiciled in mainland China; Zai Lab (Suzhou) Co., Ltd., domiciled in mainland China; Zai Biopharmaceutical (Suzhou) Co., Ltd., domiciled in mainland China; Zai Lab Trading (Suzhou) Co., Ltd., domiciled in mainland China; Zai Lab (Taiwan) Limited, domiciled in Taiwan; Zai Lab (AUST) Pty. Ltd., domiciled in Australia; and Zai Lab (US) LLC, domiciled in the United States. As of the date of this report, Zai Anti Infectives (Hong Kong) Limited has non-substantial business operations.

We own various registered trademarks, trademark applications, and unregistered trademarks and service marks, including various forms of the “ZAI LAB” and “再鼎医药” brands, as well as domain names incorporating some or all of these trademarks and our corporate logo. All other trade names, trademarks, and service marks of other companies appearing in this report are the property of their respective holders. Solely for convenience, some of the trademarks and trade names in this report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of, any other company.

Disclosures Relating to Our Chinese Operations

Zai Lab Limited is an exempted company incorporated in the Cayman Islands on March 28, 2013 with limited liability. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. We have substantial operations in mainland China. Below is a summary of certain risks related to our Chinese operations. For more information on these risks and other risks relating to our ADSs and ordinary shares (considered individually or together, “our securities”) and for material regulations that may affect our business and an investment in our securities, see Item 1A. Risk Factors and Item 1. Business – Government Regulation in our 2022 Annual Report.

Zai Lab Limited is not a Chinese operating company, but a holding company incorporated in the Cayman Islands.

Zai Lab Limited is not a Chinese operating company, but a holding company incorporated in the Cayman Islands. As a holding company, we conduct a substantial portion of our operations through wholly owned subsidiaries based in mainland China. Our investors do not hold direct investments in our Chinese operating companies. In July 2021, the Chinese government provided new guidance on Chinese companies raising capital outside of mainland China, including through arrangements called variable interest entities (“VIEs”). Currently, our corporate structure contains no VIEs, and the life sciences industry in which we operate is not subject to foreign ownership limitations in mainland China. However, there are uncertainties with respect to the Chinese legal system, and there may be changes in laws, regulations, and policies, including how those laws, regulations, and policies will be interpreted or implemented, that may affect our business or an investment in our business. If, in the future, the Chinese government determines that our corporate structure does not comply with Chinese regulations, or if Chinese regulations change or are interpreted differently, the value of our securities may decline or become worthless.

There are significant legal and operational risks associated with conducting a substantial portion of our operations in mainland China, including with respect to changes in the legal, political, and economic policies of the Chinese government, relations between mainland China and the United States, or Chinese or U.S. regulations. For example, geopolitical events, such as developments with respect to Taiwan, continue to cause heightened tensions between the United States and China. In addition, new laws and regulations, including the Counter-Espionage Law, Personal Information Protection Law, Data Security Law, Cyber Security Law and Cybersecurity Review Measures, Measures on Security Assessment of Cross-Border Data Transfer, and regulations and guidelines relating to the multi-level protection scheme, have imposed, and may continue to impose, additional restrictions or obligations and compliance-related costs on our business. In addition, our business, or our directors or employees, may be subject to enforcement actions or penalties if it is determined that we, or they, have not complied with applicable laws and regulations. Such legal and operational risks may materially and adversely affect our business, financial condition, results of operations, ability to raise capital or continue to offer our securities, and the market price of our securities.

We are or may be required to obtain certain permissions from Chinese authorities to operate in mainland China, issue our securities to foreign investors, and transfer certain scientific data.

The Chinese government has exercised, and may continue to exercise, substantial influence or control over virtually every sector of the Chinese economy through regulation and state ownership. As a result, we are or may be required to obtain certain approvals or permissions from Chinese authorities to operate in mainland China, transfer certain scientific data, and issue our securities to foreign investors.

For example, we are required to obtain certain approvals from Chinese authorities to operate our Chinese subsidiaries. To operate our general business activities in mainland China, each of our Chinese subsidiaries is required to obtain a business license from the local counterpart of the State Administration for Market Regulation (“SAMR”). Each of our Chinese subsidiaries has obtained such a business license. Our Chinese subsidiaries are also required to obtain certain licenses and permits, including but not limited to the following: Pharmaceutical Manufacturing Permits, Pharmaceutical Distribution Permits, and Medical Device Distribution Permits to manufacture and/or distribute drugs and/or applicable medical devices. No application for any such material license or permit has been denied.

Further, we are required to obtain certain approvals from Chinese authorities before transferring certain scientific data abroad or to foreign parties or entities established or controlled by those foreign parties. In addition, we may be subject to additional such requirements pursuant to the Security Assessment Measures, which may affect our Chinese subsidiaries or clinical trials. The Security Assessment Measures may require us to complete security assessments for certain cross-border data transfers, obtain prior approval from the Cyberspace Administration of China (“CAC”) for transfers out of mainland China of certain important or personal data, or obtain prior clearance or approval from the Human Genetic Resources Administration Office of China (“HGRAC”) for certain transfers of data derived from human organs, tissues, or cells of Chinese individuals that contain human genetic materials. If we are not able to obtain or maintain the necessary permissions or approvals, our ability to operate in mainland China may be restricted or prohibited, and the value of our securities could significantly decline or become worthless.

Although we are not currently required to obtain prior approval or permission from the CSRC or any other Chinese regulatory authority to issue our securities to foreign investors, the CSRC has promulgated a new set of regulations that consists of the Trial Administrative Measures for Overseas Securities Offering and Listing by Domestic Companies (the “Trial Measures”) and five supporting guidelines, which became effective on March 31, 2023. Pursuant to the Trial Measures, we may be required to submit filings to the CSRC following the submission of future overseas listings and the completion of future offerings of our equity securities to foreign investors. If we are not able to complete the necessary filings for future securities offerings, our ability to raise capital may be adversely affected.

The central or local governments could impose new, stricter regulations or interpretations of existing regulations that could impose additional requirements, require additional approvals or permissions in the future, and result in additional related expenditures and efforts on our part to comply with such regulations or interpretations. Also, as there are uncertainties with respect to the Chinese legal system and changes in laws, regulations, and policies, including how those laws, regulations, and policies will be interpreted or implemented, our business and an investment in our securities could be adversely affected.

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 report and the audited consolidated financial information and the accompanying notes included in our 2022 Annual Report.

Item 1. Financial Statements.

Zai Lab Limited

Unaudited Condensed Consolidated Balance Sheets

(in thousands of U.S. dollars (“$”), except for number of shares and per share data)


	Notes	March 31, 2023	December 31, 2022
Assets
Current assets:
Cash and cash equivalents	3	879,844	1,008,470
Short-term investments		50,550	—
Accounts receivable (net of allowance for credit loss of $13 and $11 as of March 31, 2023 and December 31, 2022, respectively)		43,346	39,963
Notes receivable		17,381	8,608
Inventories, net	4	38,405	31,621
Prepayments and other current assets		42,772	35,674
Total current assets		1,072,298	1,124,336
Restricted cash, non-current		1,003	803
Long term investments (including the fair value measured investment of $6,872 and $6,431 as of March 31, 2023 and December 31, 2022, respectively)		6,872	6,431
Prepayments for equipment		1,721	1,396
Property and equipment, net	5	58,309	57,863
Operating lease right-of-use assets		20,148	19,512
Land use rights, net		6,920	6,892
Intangible assets, net		1,479	1,511
Long-term deposits		1,324	1,396

Total assets		1,170,074	1,220,140
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable		66,361	65,974
Current operating lease liabilities		7,318	7,050
Other current liabilities	8	50,881	66,818
Total current liabilities		124,560	139,842
Deferred income		30,968	21,360
Non-current operating lease liabilities		12,979	13,343
Other non-current liabilities		325	—
Total liabilities		168,832	174,545
Commitments and contingencies (Note 15)
Shareholders’ equity
Ordinary shares (par value of $0.000006 per share; 5,000,000,000 shares authorized; 967,197,350 and 962,455,850 shares issued as of March 31, 2023 and December 31, 2022, respectively; 963,688,740 and 960,219,570 shares outstanding as of March 31, 2023 and December 31, 2022, respectively)		6	6
Additional paid-in capital		2,911,454	2,893,120
Accumulated deficit		(1,910,504)	(1,861,360)
Accumulated other comprehensive income		17,272	25,685
Treasury Stock (at cost, 3,508,610 and 2,236,280 shares as of March 31, 2023 and December 31, 2022, respectively)		(16,986)	(11,856)
Total shareholders’ equity		1,001,242	1,045,595
Total liabilities and shareholders’ equity		1,170,074	1,220,140

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Zai Lab Limited

Unaudited Condensed Consolidated Statements of Operations

(in thousands of $, except for number of shares and per share data)


		Three Months Ended March 31,
	Notes	2023	2022
Revenues:
Product revenue, net	6	62,797	46,095
Collaboration revenue		—	629
Total revenues		62,797	46,724
Expenses:
Cost of sales		(21,337)	(15,643)
Research and development		(48,472)	(53,854)
Selling, general, and administrative		(62,510)	(56,991)
Loss from operations		(69,522)	(79,764)
Interest income		10,232	188
Foreign currency gain		8,912	2,285
Other income (expenses), net	13	1,234	(4,882)
Loss before income tax and share of loss from equity method investment		(49,144)	(82,173)
Income tax expense	7	—	—
Share of loss from equity method investment		—	(221)
Net loss		(49,144)	(82,394)
Net loss attributable to ordinary shareholders		(49,144)	(82,394)
Loss per share - basic and diluted	9	(0.05)	(0.09)
Weighted-average shares used in calculating net loss per ordinary share - basic and diluted		961,444,780	955,499,030
Loss per American Depositary Shares (“ADS”) - basic and diluted		(0.51)	(0.86)
Weighted-average ADSs used in calculating net loss per ADS - basic and diluted		96,144,478	95,549,903

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Zai Lab Limited

Unaudited Condensed Consolidated Statements of Comprehensive Loss

(in thousands of $)


	Three Months Ended March 31,
	2023	2022
Net loss	(49,144)	(82,394)
Other comprehensive income (loss), net of tax of nil:
Foreign currency translation adjustments	(8,413)	(2,193)
Comprehensive loss	(57,557)	(84,587)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Zai Lab Limited

Unaudited Condensed Consolidated Statements of Shareholders’ Equity

(in thousands of $, except for number of shares)


	Ordinary Shares		Additional paid in capital	Accumulated deficit	Accumulated other comprehensive income (loss)	Treasury Stock		Total
	Number of Shares	Amount				Shares	Amount
Balance at December 31, 2022	962,455,850	6	2,893,120	(1,861,360)	25,685	(2,236,280)	(11,856)	1,045,595
Issuance of ordinary shares upon vesting of restricted shares	732,040	0	0	—	—	—	—	—
Exercise of shares options	4,009,460	0	1,673	—	—	—	—	1,673
Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation	—	—	—	—	—	(1,272,330)	(5,130)	(5,130)
Share-based compensation	—	—	16,661	—	—	—	—	16,661
Net loss	—	—	—	(49,144)	—	—	—	(49,144)
Foreign currency translation	—	—	—	—	(8,413)	—	—	(8,413)
Balance at March 31, 2023	967,197,350	6	2,911,454	(1,910,504)	17,272	(3,508,610)	(16,986)	1,001,242


Balance at December 31, 2021	955,363,980	6	2,825,948	(1,418,074)	(23,645)	(382,930)	(4,279)	1,379,956
Issuance of ordinary shares upon vesting of restricted shares	514,800	0	0	—	—	—	—	—
Exercise of shares options	1,156,660	0	297	—	—	—	—	297
Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation	—	—	—	—	—	(15,150)	(68)	(68)
Share-based compensation	—	—	12,410	—	—	—	—	12,410
Net loss	—	—	—	(82,394)	—	—	—	(82,394)
Foreign currency translation	—	—	—	—	(2,193)	—	—	(2,193)
Balance at March 31, 2022	957,035,440	6	2,838,655	(1,500,468)	(25,838)	(398,080)	(4,347)	1,308,008

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. “0” in above table means less than 1,000 dollars.

Zai Lab Limited

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands of $)


	Three Months Ended March 31,
	2023	2022
Cash flows from operating activities
Net loss	(49,144)	(82,394)
Adjustments to reconcile net loss to net cash used in operating activities:
Allowance for credit loss (gain)	1	(1)
Inventory write-down	377	138
Depreciation and amortization expenses	2,657	2,013
Amortization of deferred income	(582)	(708)
Share-based compensation	16,661	12,410
Share of loss from equity method investment	—	221
(Gain) Loss from fair value changes of equity investment with readily determinable fair value	(441)	6,939
Loss (gain) on disposal of property and equipment	64	(11)
Non-cash lease expenses	2,464	2,017
Foreign currency remeasurement gain	(8,912)	(2,285)
Changes in operating assets and liabilities:
Accounts receivable	(2,852)	14,080
Notes receivable	(8,599)	(3,513)
Inventories	(6,686)	(1,475)
Prepayments and other current assets	(6,470)	1,531
Long-term deposits	72	(71)
Value added tax recoverable	—	3,092
Accounts payable	(327)	(28,002)
Other current liabilities	(15,593)	(8,837)
Operating lease liabilities	(2,141)	(2,389)
Deferred income	9,839	118
Other non-current liabilities	325	—
Net cash used in operating activities	(69,287)	(87,127)
Cash flows from investing activities
Purchases of short-term investments	(100,000)	(120,274)
Proceeds from maturity of short-term investment	49,450	100,000
Disposal of property and equipment	112	25
Purchases of property and equipment	(3,513)	(9,743)
Purchases of intangible assets	(3)	(152)
Net cash used in investing activities	(53,954)	(30,144)
Cash flows from financing activities
Proceeds from exercises of stock options	1,197	297
Employee taxes paid related to settlement of equity awards	(5,083)	(39)
Net cash (used in) provided by financing activities	(3,886)	258
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash	(1,299)	(130)
Net decrease in cash, cash equivalents and restricted cash	(128,426)	(117,143)
Cash, cash equivalents and restricted cash - beginning of period	1,009,273	964,903
Cash, cash equivalents and restricted cash - end of period	880,847	847,760
Supplemental disclosure on non-cash investing and financing activities
Payables for purchase of property and equipment	4,232	668
Payables for intangible assets	268	73
Payables for treasury stock	—	55
Receivables for stock option exercise under equity incentive plans	476	—
Right-of-use asset acquired under operating leases	2,662	4,596
Receivables for dispose of property and equipment	10	—
Supplemental disclosure of cash flow information
Cash and cash equivalents	879,844	846,957
Restricted cash, non-current	1,003	803
Total cash and cash equivalents and restricted cash	880,847	847,760

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Zai Lab Limited

Notes to the unaudited condensed consolidated financial statements

1. Organization and Principal Activities

Zai Lab Limited was incorporated on March 28, 2013 in the Cayman Islands as an exempted company with limited liability under the Companies Act of the Cayman Islands (as amended). Zai Lab Limited and its subsidiaries (collectively referred to as the “Company”) are focused on discovering, developing, and commercializing products and product candidates that address medical conditions with significant unmet needs, including in the areas of oncology, autoimmune disorders, infectious diseases, and neuroscience.

The Company’s principal operations and geographic markets are in Greater China. The Company has a substantial presence in Greater China and the United States. The accompanying unaudited condensed consolidated financial statements are the financial statements of the Company.

2. Basis of Presentation and Consolidation and Significant Accounting Policies

(a) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), and applicable rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 1, 2023 (the “2022 Annual Report”). The December 31, 2022 condensed consolidated balance sheet data included in this report were derived from the audited financial statements included in the 2022 Annual Report.

In the third quarter of 2022, we began to separately present the amount of foreign currency remeasurement gain (loss) on our statements of cash flows. This amount was previously included in changes in other current liabilities. This change did not have any impact on net cash used in operating activities. Corresponding amount in the prior period of the condensed consolidated financial statement has been presented to conform to the current period presentation.

The accompanying condensed consolidated financial statements reflect all normal recurring adjustments that are necessary to present fairly the results for the interim periods presented. Interim results are not necessarily indicative of the results for the year ending December 31, 2023.

(b) Principles of Consolidation

The unaudited condensed consolidated financial statements include the financial statements of the Company. All intercompany transactions and balances are eliminated upon consolidation.

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments, 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 revenues and expenses during the period. Areas where management uses subjective judgment include, but are not limited to, accrual of rebates, recognition of research and development expenses to the appropriate financial reporting period based on the progress of the research and development projects, fair value of share-based compensation expenses, and recoverability of deferred tax assets. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates.

Zai Lab Limited

Notes to the unaudited condensed consolidated financial statements

(d) Fair Value Measurements

Equity investments with readily determinable fair value are measured using level 1 inputs and were $6.9 million and $6.4 million as of March 31, 2023 and December 31, 2022, respectively. The unrealized gains and losses from fair value changes are recognized in other income (expenses), net in the consolidated statements of operations.

Financial instruments of the Company primarily include cash, cash equivalents and restricted cash, short-term investments, accounts receivable, notes receivable, prepayments and other current assets, accounts payable, and other current liabilities. As of March 31, 2023 and December 31, 2022, the carrying values of cash and cash equivalents, short-term investments, accounts receivable, notes receivable, prepayments and other current assets, accounts payable, and other current liabilities approximated their fair values due to the short-term maturity of these instruments, and the carrying value of restricted cash approximated its fair value based on the nature of the assessment of the ability to recover these amounts.

(e) Recent Accounting Pronouncements

There were no standards adopted since the 2022 Annual Report.

(f) Significant Accounting Policies

For a more complete discussion of the Company’s significant accounting policies, the unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the 2022 Annual Report.

3. Cash and Cash Equivalents

The following table presents the Company’s cash and cash equivalents ($ in thousands):


	March 31, 2023	December 31, 2022

Cash at bank and in hand	878,786	1,007,423
Cash equivalents (i)	1,058	1,047
	879,844	1,008,470
Denominated in:
US$	836,981	957,824
RMB (ii)	38,278	45,486
Hong Kong dollar (“HK$”)	3,864	4,378
Australian dollar (“A$”)	588	598
Taiwan dollar (“TW$”)	133	184
	879,844	1,008,470

(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 mainland 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 Chinese government.

4. Inventories, Net

The Company’s net inventory balance was $38.4 million and $31.6 million as of March 31, 2023 and December 31, 2022, respectively, and mainly consisted of finished goods purchased from Tesaro Inc., now GlaxoSmithKline (“GSK”), for distribution in Hong Kong, from NovoCure Limited (“NovoCure”) for distribution in Hong Kong and mainland China, and from Deciphera Pharmaceuticals, LLC (“Deciphera”) for distribution in Hong Kong, mainland China and Taiwan, as well as finished goods and certain raw materials for ZEJULA and NUZYRA commercialization in mainland China.

Zai Lab Limited

Notes to the unaudited condensed consolidated financial statements

The following table presents the Company’s inventories, net ($ in thousands):


	March 31, 2023	December 31, 2022

Finished goods	17,832	12,156
Raw materials	20,521	19,029
Work in Progress	52	436
Inventories, net	38,405	31,621

The Company writes down inventory for any excess or obsolete inventories or when the Company believes that the net realizable value of inventories is less than the carrying value. The Company recorded write-downs in cost of sales of $0.4 million and $0.1 million for the first quarter of 2023 and 2022, respectively.

5. Property and Equipment, Net

The following table presents the components of the Company’s property and equipment, net ($ in thousands):


	March 31, 2023	December 31, 2022

Office equipment	998	977
Electronic equipment	8,315	7,416
Vehicle	205	202
Laboratory equipment	19,491	18,726
Manufacturing equipment	16,763	17,055
Leasehold improvements	11,470	11,300
Construction in progress	25,546	24,251
	82,788	79,927
Less: accumulated depreciation	(24,479)	(22,064)
Property and equipment, net	58,309	57,863

Depreciation expense was $2.5 million and $1.9 million for the first quarter of 2023 and 2022, respectively.

6. Revenue

Product Revenue

The Company’s product revenue is primarily derived from the sales of ZEJULA, Optune, QINLOCK, and NUZYRA in mainland China and Hong Kong. The table below presents the Company’s product revenue ($ in thousands):


	Three Months Ended March 31,
	2023	2022

Product revenue - gross	71,212	53,310
Less: Rebates and sales returns	(8,415)	(7,215)
Product revenue - net	62,797	46,095

Sales rebates are offered to distributors in mainland China, and the amounts are recorded as a reduction of revenue. Estimated rebates are determined based on contracted rates, sales volumes, and level of distributor inventories.

Zai Lab Limited

Notes to the unaudited condensed consolidated financial statements

The following table presents the Company’s net revenue by product ($ in thousands):


	Three Months Ended March 31,
	2023	2022

ZEJULA	42,680	29,597
Optune	13,342	12,797
QINLOCK	1,306	2,959
NUZYRA	5,469	742
Product revenue - net	62,797	46,095

7. 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 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 March 31, 2023 and December 31, 2022. No unrecognized tax benefits and related interest and penalties were recorded in the periods presented.

8. Other Current Liabilities

The following table presents the Company’s other current liabilities ($ in thousands):


	March 31, 2023	December 31, 2022

Payroll	11,472	31,689
Accrued professional service fee	7,148	4,080
Payables for purchase of property and equipment	4,232	5,269
Accrued rebate to distributors	11,536	8,443
Tax payables	13,001	13,283
Others (i)	3,492	4,054
Total	50,881	66,818

(i)Others mainly include accrued travel and business-related expenses.

9. Loss Per Share

The following table presents the computation of the basic and diluted net loss per share ($ in thousands, except share and per share data):


	Three Months Ended March 31,
	2023	2022

Numerator:
Net loss attributable to ordinary shareholders	(49,144)	(82,394)
Denominator:
Weighted average number of ordinary shares - basic and diluted	961,444,780	955,499,030
Net loss per share - basic and diluted	(0.05)	(0.09)

As a result of the Company’s net loss for the first quarter of 2023 and 2022, 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

Zai Lab Limited

Notes to the unaudited condensed consolidated financial statements

would have been anti-dilutive.


	March 31
	2023	2022
Share options	86,242,060	80,514,330
Non-vested restricted shares	32,154,670	9,846,360

10.

SEC Form 10-Q filed by Zai Lab Limited