UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________
FORM 10-Q
____________________
FORM
10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 20222023
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
______ to ______
to
Commission File Number:
001-38205
____________________
Zai Lab logo.jpg
ZAI LAB LIMITED
(Exact Name of Registrant as Specified in its Charter)
____________________
Cayman Islands
98-1144595
(State or other jurisdictionOther Jurisdiction of
incorporation
Incorporation
or organization)
Organization)
(I.R.S. Employer

Identification No.)
4560 Jinke Road
Bldg. 1, Fourth Floor,
Pudong
Shanghai
Shanghai, China
201210
314 Main Street
4th Floor, Suite 100
Cambridge, MA, USA
02142
(Address of principal executive offices)Principal Executive Offices)
(Zip Code)
+86 21 6163216163 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)
Trading
Symbol(s)
Name of each exchange
on which registered
American Depositary Shares, each representing 10 Ordinary Share,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.
*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 filerxAccelerated filero
Non-accelerated filero
Non-accelerated
filer
Smaller reporting companyo
Emerging growth companyo
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 5, 2022,3, 2023, 979,087,430 ordinary shares of the registrant, par value $0.000006 per share, were outstanding, of which 729,604,650743,576,320 ordinary shares were held in the form of American Depositary Shares.




Forward-Looking Statements
This Quarterly Report on Form 10-Qreport 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,“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 nor are theyor 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 those discussedthe 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, 2021,2022 filed with the U.S. Securities and Exchange Commission (SEC)(“SEC”) on March 1, 20222023 (the “2021“2022 Annual Report”) and in this Quarterly Report on Form 10-Q.report. 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,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 Quarterly Report on Form 10-Q. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.
report.
Usage of Terms
Unless the context requires otherwise, references in this Quarterly Report on Form 10-Qreport to “Greater China” refer to mainland China, Hong Kong Special Administrative Region (“HKSAR”Hong Kong” or “Hong Kong”“HK”), Macau Special Administrative Region (“Macau SAR” or “Macau”Macau”), and Taiwan, collectively; 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; and references to “Zai Lab Limited” refer to Zai Lab Limited, a holding company. Zai Lab Limited is the entity in which investors are purchasinghold 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. Additionally, asAs of the date of this Quarterly Report on Form 10-Q,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. Investors willOur 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 or VIEs.(“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.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 American Depositary Shares (“ADSs”) or ordinary sharessecurities 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 thatwith respect to changes in the legal, political, and economic policies of the Chinese government, the relations between mainland China and the United States, or Chinese or U.S. regulations, that 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 ADSs or ordinary shares.securities.

There are significant legal and operational risks associated with conducting a substantial portion of our operations in mainland China, including thatwith respect to changes in the legal, political, and economic policies of the Chinese government, the relations between mainland China and the United States, or Chinese or U.S. regulations. 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 ADSssecurities.
We are 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 the Chinese government, including the recent enactment of China’s Data Security Law, as well as our obligations to comply with China’s new Cybersecurity Review Measures (which became effective on February 15, 2022), regulations and guidelines relating to the multi-level protection scheme, Personal Information Protection Law, or PIPL and any other future laws and regulations may require us to incur significant expenses and could materially affect our ability to conduct our business, accept foreign investments or continue to be listed on a U.S. or foreign stock exchange.
For more information on these risks and other risks relating to our ADSs and ordinary shares, see “Item 1A. Risk Factors” in our 2021 Annual Report and in this Quarterly Report on Form 10-Q.
We are required to obtain certain permissions from Chinese authorities to operate in mainland China, issue our securities to foreign investors, and transfer certain scientific data.
We are required to obtain certain permissions from Chinese authorities to operate, issue securities to foreign investors and transfer certain scientific data. The Chinese government has exercised, and may continue to exercise, substantial influence or control over virtually every sector of the Chinese economy through regulation and state ownership. Our abilityAs a result, we are or may be required to obtain certain approvals or permissions from Chinese authorities to operate in mainland China, may be undermined iftransfer certain scientific data, and issue our Chinese subsidiaries are not able to obtain or maintain approvals to operate in mainland China. The central or local governments could impose new, stricter regulations or interpretations of existing regulations that could require additional expenditures and efforts on our part to comply with such regulations or interpretations.
As of the date of this Quarterly Report on Form 10-Q, we are not currently required to obtain approval or prior permission from the China Securities Regulatory Commission, or CSRC, or any other Chinese regulatory authority under the Chinese laws and regulations currently in effect to issue securities to foreign investors. However, the CSRC recently released for public comment draft rules titled Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) and Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments), or the Draft Rules. If the Draft Rules are adopted in their current form,
For example, we would likely be required to submit filings to the CSRC in connection with the future issuance of our equity securities to foreign investors. As there are uncertainties with respect to the Chinese legal system and changes in laws, regulations and policies, including how those laws, regulations and policies will be interpreted or implemented, we could be subject to additional requirements, approvals, or permissions in the future. We are required to obtain certain approvals from Chinese authorities in order to operate our Chinese subsidiaries. We are also required to obtain certain approvals from Chinese authorities before transferring certain scientific data abroad or to foreign parties or entities established or actually controlled by them.
If our Chinese subsidiaries do not receive or maintain approvals or inadvertently conclude that approvals needed for their business are not required, or if there are changes in applicable laws (including regulations) or interpretations of laws, and our Chinese subsidiaries are required but unable to obtain approvals in the future, then such changes or need for approvals (if not obtained) could adversely affect the operations of our Chinese subsidiaries, including limiting or prohibiting the ability of our Chinese subsidiaries to operate, and the value of our ADSs or ordinary shares could significantly decline or become worthless.
For more information on these required permissions, see “Item 1A. Risk Factors” in our 2021 Annual Report and in this Quarterly Report on Form 10-Q.
To operate our general business activities currently conducted in mainland China, each of our Chinese subsidiaries is required to obtain a business license from the local counterpart of the State Administration for Market Regulation or SAMR.
To operate our general business activities currently conducted in mainland China, each of our Chinese subsidiaries is required to obtain a business license from the local counterpart of the SAMR.(“SAMR”). Each of our Chinese subsidiaries has obtained such a valid business license from the local counterpart of the SAMR and no application for any such license has been denied.license. Our Chinese subsidiaries are also required to obtain certain licenses and permits, including but not limited to the following material licenses and permits: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.

BecauseChina (“CAC”) for transfers out of mainland China of certain important or personal data, or obtain prior clearance or approval from the majorityHuman 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 operations areability to operate in mainland China may be restricted or prohibited, and our auditor has been located in mainland China, a jurisdiction where the U.S. Public Company Accounting Oversight Board (“PCAOB”) is currently unable to conduct inspections without the approval of Chinese authorities, there have been concerns regarding oversight of the audits of our financial statements filed with the SEC. In March 2022, SEC staff conclusively identified us under the Holding Foreign Companies Accountable Act (“HFCAA”) as an issuer that uses an auditor that the PCAOB is unable to inspect or investigate completely. Although in April 2022 our Audit Committee approved the engagement of KPMG LLP (“KPMG”), a U.S. auditor that is subject to inspection by the PCAOB, as our independent public accounting firm for the fiscal year ending December 31, 2022, KPMG is in the process of concluding its standard client evaluation procedures, including obtaining approval from the Hong Kong Stock Exchange to audit the Company’s consolidated financial statements submitted to the Hong Kong Stock Exchange. If for any reason we continue to fail to meet the audit requirements of the HFCAA for three consecutive years, the HFCAA requires the SEC to prohibit the tradingvalue of our securities on a national securities exchange, including Nasdaq,could significantly decline or on over-the-counter markets inbecome worthless.
Although we are not currently required to obtain prior approval or permission from the United States. In addition, the U.S. Senate and U.S. House of Representatives have each passed bills, which, if enacted, would decrease the number of non-inspection years from three consecutive yearsCSRC or any other Chinese regulatory authority to two, thus reducing the time period beforeissue 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 prohibited from trading on a U.S. securities exchange or delisted from Nasdaq. The foregoing could adversely affectrequired to submit filings to the market priceCSRC following the submission of future overseas listings and the completion of future offerings of our ordinary shares and/or ADSs andequity securities to foreign investors. If we are not able to complete the necessary filings for future securities offerings, our ability to raise capital effectively.
may be adversely affected.
AuditorsThe central or local governments could impose new, stricter regulations or interpretations of companiesexisting regulations that are registered with the SEC and traded publiclycould impose additional requirements, require additional approvals or permissions in the United States, including our independent registered public accounting firm, are required to be registered with the PCAOBfuture, and to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and applicable professional standards. Because our current auditor is located in mainland China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of Chinese authorities, our auditor is not currently inspected by the PCAOB.
PCAOB inspections of auditors located outside of mainland China and Hong Kong have at times identified deficiencies in those auditors’ audit procedures and quality control procedures, which may be addressed as part of the PCAOB’s inspection process to improve future audit quality. The lack of PCAOB inspections of audit work undertaken in mainland China and Hong Kong prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors are deprived of the benefits of PCAOB inspections, which could result in limitations or restrictionsadditional related expenditures and efforts on our access to the U.S. capital markets.
Furthermore, in recent years, the U.S. Congress and regulatory authorities have continued to express concerns about challenges in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. As part of this continued focus on access to audit and other information currently protected by national law, in particular under Chinese law, the United States enacted the HFCAA in December 2020. The HFCAA requires the SEC to identify issuers that have filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction (a “Commission-Identified Issuer”). Under the HFCAA, if the SEC conclusively identifies an issuer as a Commission-Identified Issuer for three consecutive years, the SEC is required to prohibit the trading of the issuer’s securities on a national securities exchange or through any other method that is within the jurisdiction of the SEC to regulate, including over-the-counter markets in the United States. Our securities may be prohibited from trading on the Nasdaq or other U.S. stock exchanges if our auditor is not inspected by the PCAOB for three consecutive years, and this ultimately could result in our ADSs being delisted.
Furthermore, in June 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (“AHFCAA”), which, if enacted, would amend the HFCAA and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years (as opposed to the three years under the HFCAA). In February 2022, the U.S. House of Representatives passed the America Creating Opportunities for Manufacturing Pre-Eminence in Technology and Economic Strength (COMPETES) Act of 2022 (the “America COMPETES Act”), which similarly would amend the HFCAA to shorten the number of non-inspection years from three years to two years. The America COMPETES Act, however, includes a broader range of legislation than the AHFCA Act in response to the U.S. Innovation and Competition Act passed by the U.S. Senate in 2021. The U.S. House of Representatives and the U.S. Senate will need to agree on amendments to these respective bills to allow the legislature to pass their amended bills before the President can sign the bill into law. It is unclear if or when either of these bills will be signed into law.
In September 2021, the PCAOB adopted PCAOB Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act, which provides a framework for the PCAOB to use when determining whether the PCAOB is unable to inspect or investigate completely a registered public accounting firm located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction for the purposes of the HFCAA. PCAOB Rule 6100 establishes the manner of the PCAOB’s determinations; the factors the PCAOB will evaluate and the documents and information it will consider when assessing whether a determination is warranted; the form, public availability, effective date, and duration of such determinations; and the process by which the PCAOB will reaffirm, modify or vacate any such determinations. In November 2021, the SEC announced that it had approved Rule 6100.

In December 2021, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCAA for Commission-Identified Issuers, which became effective on January 10, 2022. In addition, the PCAOB issued a Determination Report, pursuant to PCAOB Rule 6100, which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong because of positions taken by Chinese authorities in those jurisdictions. The SEC began to identify Commission-Identified Issuers for fiscal years beginning after December 18, 2020. A Commission-Identified Issuer will be required to comply with such regulations or interpretations. Also, as there are uncertainties with respect to the submissionChinese legal system and disclosure requirementschanges in the annual report for each year in which it was so identified. If an issuer is identified as a Commission-Identified Issuer based on its annual report for the fiscal year ended December 31, 2021, the issuerlaws, regulations, and policies, including how those laws, regulations, and policies will be required to comply with the submissioninterpreted or disclosure requirementsimplemented, our business and an investment in its annual report for the fiscal year ended December 31, 2022.
In March 2022, SEC staff conclusively identified the Company as a Commission-Identified Issuer. In April 2022 the Audit Committee of our Board of Directors approved the engagement of KPMG, an auditor located in the United States that is inspected by the PCAOB, as our independent registered public accounting firm for the fiscal year ending December 31, 2022 for the annual consolidated financial statements of the Company filed with the SEC and the Company’s internal controls over financial reporting in accordance with the Exchange Act. KPMG will also be engaged to audit the consolidated financial statements of the Company for the year ending December 31, 2022 submitted to the Hong Kong Stock Exchange in accordance with the Rules Governing the Listing of Securities of the Hong Kong Stock Exchange, subject to the Company’s receipt of the approval from the Hong Kong Stock Exchange and the FRC. Even though such approval is expected to be administrative in nature, if such approval is rejected by the Hong Kong Stock Exchange or the FRC, or, for some reason, we are not able to enter into an engagement agreement with KPMG, the Company would need to engage another auditor that is inspected by the PCAOB in order to comply with the audit requirements of the HFCAA. Additionally, even if KPMG is approved as our auditor by the Hong Kong Stock Exchange and the FRC, there remains a risk that the CSRC or another Chinese governmental agency could limit or prohibit our ability to use KPMG as our auditor. The foregoing could adversely affect the market price of our ordinary shares and/or ADSs and our ability to raise capital effectively.
While we understand that there appears to be ongoing, constructive dialogue among the CSRC, the SEC and the PCAOB regarding permitting the inspection of PCAOB-registered accounting firms in China, there can be no assurance that the U.S. and Chinese governments ultimately reach an agreement on these matters, or that we will be able to comply with requirements imposed by U.S. regulators, Nasdaq, the CSRC, or other Chinese regulators. If for any reason we continue to be identified as a Commission-Identified Issuer that uses an auditor not subject to PCAOB inspection for three consecutive years or, if the AHFCAA or the America COMPETES Act is passed, two consecutive years, our ADSs may be delisted from Nasdaq as a result. Delisting of our ADSs would force holders of our ADSs to sell their ADSs or convert them into our ordinary shares. Further, we may be prohibited from listing our ADSs on another U.S. securities exchange. The market price of our ordinary shares and/or ADSs could be adversely affected as a result of anticipated negative impacts of such legislative or executive actions upon, as well as negative investor sentiment toward, companies with significant operations in mainland China and Hong Kong that are listed in the United States, regardless of whether such actions are implemented and regardless of our actual operating performance.affected.


Table of Contents

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-Qreport and the audited consolidated financial information and the accompanying notes included in our 20212022 Annual Report.
1


Item 1. Financial
Statements.
Zai Lab Limited
Unaudited condensed consolidated balance sheets
Condensed Consolidated Balance Sheets
(Inin thousands of U.S. dollars (“$”), except for number of shares and per share data)
NotesMarch 31,
2023
December 31,
2022
Assets
Current assets:
Cash and cash equivalents3879,844 1,008,470 
Short-term investments50,550 — 
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 receivable17,381 8,608 
Inventories, net438,405 31,621 
Prepayments and other current assets42,772 35,674 
Total current assets1,072,298 1,124,336 
Restricted cash, non-current1,003 803 
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 equipment1,721 1,396 
Property and equipment, net558,309 57,863 
Operating lease right-of-use assets20,148 19,512 
Land use rights, net6,920 6,892 
Intangible assets, net1,479 1,511 
Long-term deposits1,324 1,396 
Total assets1,170,074 1,220,140 
Liabilities and shareholders’ equity  
Current liabilities:  
Accounts payable66,361 65,974 
Current operating lease liabilities7,318 7,050 
Other current liabilities850,881 66,818 
Total current liabilities124,560 139,842 
Deferred income30,968 21,360 
Non-current operating lease liabilities12,979 13,343 
Other non-current liabilities325 — 
Total liabilities168,832 174,545 
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)
Additional paid-in capital2,911,454 2,893,120 
Accumulated deficit(1,910,504)(1,861,360)
Accumulated other comprehensive income17,272 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’ equity1,001,242 1,045,595 
Total liabilities and shareholders’ equity1,170,074 1,220,140 
       
As of
 
   
Notes
   
March 31,

2022
  
December 31,

2021
 
       
$
  
$
 
Assets
     
Current assets:
     
Cash and cash equivalents   3    846,957   964,100 
Short-term investments        465,274   445,000 
Accounts receivable (net of allowance for credit loss of $10 and $11 as of March 31, 2022 and
December 31, 2021, respectively)
        33,394   47,474 
Notes receivable        10,848   7,335 
Inventories   4    20,288   18,951 
Prepayments and other current assets        16,490   18,021 
               
Total current assets        1,393,251   1,500,881 
Restricted cash,
non-current
        803   803 
Long term investments (including the fair value measured investment of $8,444 and $15,383 as of
March 31, 2022 and December 31, 2021, respectively)
        8,444   15,605 
Prepayments for equipment        4,978   989 
Property and equipment, net   5    45,227   43,102 
Operating lease right-of-use assets        16,986   14,189 
Land use rights, net        7,774   7,811 
Intangible assets, net        1,745   1,848 
Long-term deposits        941   870 
Value added tax recoverable        20,766   23,858 
               
Total assets
       
 
1,500,915
 
 
 
1,609,956
 
               
Liabilities and shareholders’ equity
              
Current liabilities:
              
Accounts payable        98,161   126,163 
Current operating lease liabilities        6,795   5,927 
Other current liabilities   8    49,956   60,811 
               
Total current liabilities        154,912   192,901 
               
Deferred income        26,896   27,486 
Non-current
operating lease liabilities
        11,099   9,613 
               
Total liabilities
       
 
192,907
 
 
 
230,000
 
               
Commitments and contingencies (Note 1
4
)
            
Shareholders’ equity
              
Ordinary shares (par value of $0.000006 per share; 5,000,000,000 shares
authorized;
 957,035,440 and 955,363,980
shares issued as of March 31, 2022 and December 31, 2021, respectively; 956,637,360 and 954,981,050 shares outstanding as of March 31, 2022 and December 31, 2021, respectively)
        6   6 
Additional
paid-in
capital
        2,838,655   2,825,948 
Accumulated deficit        (1,500,468  (1,418,074
Accumulated other comprehensive loss        (25,838  (23,645
Treasury Stock (at cost, 398,080 and 382,930 shares as of March 31, 2022 and December 31, 2021, respectively)        (4,347  (4,279
               
Total shareholders’ equity
       
 
1,308,008
 
 
 
1,379,956
 
               
Total liabilities and shareholders’ equity
       
 
1,500,915
 
 
 
1,609,956
 
               
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2

Zai Lab Limited
Unaudited condensed consolidated statementsCondensed Consolidated Statements of operations
Operations
(Inin thousands of U.S. dollars (“$”)$, except for number of shares and per share data)
Three Months Ended March 31,
Notes20232022
Revenues:
Product revenue, net662,797 46,095 
Collaboration revenue— 629 
Total revenues62,797 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 income10,232 188 
Foreign currency gain8,912 2,285 
Other income (expenses), net131,234 (4,882)
Loss before income tax and share of loss from equity method investment(49,144)(82,173)
Income tax expense7— — 
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 diluted9(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 

       
Three Months Ended March 31,
 
   
Notes
   
2022
  
2021
 
       
$
  
$
 
Revenues:              
Product
revenue
, net
   6    46,095   20,103 
Collaboration revenue

    6    629   
—  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
      
46,724
   
20,103
 
Expenses:              
Cost of sales        (15,643  (7,505
Research and development        (53,854  (203,852
Selling, general and administrative        (56,991  (35,838
               
Loss from operations        (79,764  (227,092
Interest income        188   214 
Other expenses, net        (2,597  (6,227
               
Loss before income tax and share of
income (loss)
from equity method investment
        (82,173  (233,105
Income tax expense   
7

    0—     0   
Share of
income (loss)
from equity method investment
        (221  195 
               
Net loss        (82,394  (232,910
               
Net loss attributable to ordinary shareholders        (82,394  (232,910
               
Loss per share - basic and diluted   
9

    (0.09  (0.26
Weighted-average shares used in calculating net loss per ordinary share - basic and diluted        955,499,030   883,749,280 
Loss per American Depositary Shares (“ADS“)- basic and diluted   
    (0.86  (2.64
Weighted-average ADS
s
used in calculating net loss per
ADS
- basic and diluted
        95,549,903   88,374,928 
Note: All the numbers of ordinary shares and per share data in these unaudited condensed consolidated financial statements have been retrospectively adjusted as a result of the Share Subdivision and the ADS Ratio Change that became effective on March 30, 2022. The Share Subdivision and ADS Ratio Change did not result in any change to the number of outstanding ADSs of the Company. Refer to Note 2(a) for a detailed discussion.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Zai Lab Limited
Unaudited condensed consolidated statementsCondensed Consolidated Statements of comprehensive loss
Comprehensive Loss
(Inin thousands of U.S. dollars (“$”) except for number of shares and per share data)
$)
   
Three Months Ended March 31,
 
   
2022
  
2021
 
   
$
  
$
 
Net loss   (82,394  (232,910
Other comprehensive (loss) income, net of tax of NaN:         
Foreign currency translation adjustments   (2,193  2,900 
          
Comprehensive loss   (84,587  (230,010
          

Three Months Ended March 31,
20232022
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.
4

Zai Lab Limited
Unaudited condensed consolidated statementsCondensed Consolidated Statements of shareholders’ equity
Shareholders’ Equity
(Inin thousands of U.S. dollars (“$”)$, except for number of shares and per share data)
shares)
   
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   878,110,260    5    1,897,467    (713,603  (14,524  —     —     1,169,345 
Issuance of ordinary shares upon vesting of restricted shares   816,000    0    0    —     —     —     —     0   
Exercise of shares option
s
   583,640    0    702    —     —     —     —     702 
Issuance of ordinary shares in connection with collaboration and license arrangement (Note 1
2
)
   5,681,820    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 translation   —      —      —      —     2,900   —     —     2,900 
                                     
Balance at March 31, 2021   885,191,720    5    1,967,802    (946,513  (11,624  —     —     1,009,670 
                                     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 

Ordinary SharesAdditional
paid
in capital
Accumulated
deficit
Accumulated
other
comprehensive
income (loss)
Treasury StockTotal
Number
of
Shares
AmountSharesAmount
Balance at December 31, 2022962,455,850 2,893,120 (1,861,360)25,685 (2,236,280)(11,856)1,045,595 
Issuance of ordinary shares upon vesting of restricted shares732,040 00— — — — — 
Exercise of shares options4,009,460 01,673 — — — — 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, 2023967,197,350 2,911,454 (1,910,504)17,272 (3,508,610)(16,986)1,001,242 
Balance at December 31, 2021955,363,980 2,825,948 (1,418,074)(23,645)(382,930)(4,279)1,379,956 
Issuance of ordinary shares upon vesting of restricted shares514,800 00— — — — — 
Exercise of shares options1,156,660 0297 — — — — 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, 2022957,035,440 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.
5


Zai Lab Limited
Unaudited condensed consolidated statementsCondensed Consolidated Statements of cash flows
Cash Flows
(Inin thousands of U.S. dollars (“$”) except for number of shares and per share data)
$)
Three Months Ended March 31,
20232022
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)
Inventory write-down377 138 
Depreciation and amortization expenses2,657 2,013 
Amortization of deferred income(582)(708)
Share-based compensation16,661 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 equipment64 (11)
Non-cash lease expenses2,464 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 deposits72 (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 income9,839 118 
Other non-current liabilities325 — 
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 investment49,450 100,000 
Disposal of property and equipment112 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 options1,197 297 
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 period1,009,273 964,903 
Cash, cash equivalents and restricted cash - end of period880,847 847,760 
Supplemental disclosure on non-cash investing and financing activities  
Payables for purchase of property and equipment4,232 668 
Payables for intangible assets268 73 
Payables for treasury stock— 55 
Receivables for stock option exercise under equity incentive plans476 — 
Right-of-use asset acquired under operating leases2,662 4,596 
Receivables for dispose of property and equipment10 — 
Supplemental disclosure of cash flow information  
Cash and cash equivalents879,844 846,957 
Restricted cash, non-current1,003 803 
Total cash and cash equivalents and restricted cash880,847 847,760 
   
Three Months Ended
March 31,
 
   
2022
  
2021
 
   
$
  
$
 
Operating activities
   
Net loss   (82,394  (232,910
Adjustments to reconcile net loss to net cash used in operating activities:         
Allowance for credit loss   (1  1 
Inventory write-down   138   14 
Depreciation and amortization expenses   2,013   1,448 
Amortization of deferred income   (708  (78
Share-based compensation   12,410   7,318 
Noncash research and development expenses   0     62,250 
Share of (income) loss from equity method investment   221   (195
Loss from fair value changes of equity investment with readily determinable fair value   6,939   0   
(Gain) loss on disposal of property and equipment   (11  4 
Noncash lease expenses   2,017   1,322 
Changes in operating assets and liabilities:         
Accounts receivable   14,080   (3,651
Notes receivable   (3,513)  0   
Inventories   (1,475  502 
Prepayments and other current assets   1,531   (3,386
Long
-
term deposits
   (71  (47
Value added tax recoverable   3,092   (1,558
Accounts payable   (28,002  (21,226
Other current liabilities   (11,122  21,707 
Operating lease liabilities   (2,389  (893
Deferred income   118   (122
          
Net cash used in operating activities   (87,127  (169,500
          
Cash flows from investing activities:
         
Purchases of short-term investments   (120,274  0   
Proceeds from maturity of short-term investment   100,000   743,902 
Disposal of property and equipment   25
   —   
Purchase of property and equipment   (9,743  (1,683
Purchase of intangible assets   (152  (214
          
Net cash
(used in) 
provided by investing activities
   (30,144  742,005 
          
Cash flows from financing activities:
         
Proceeds from exercises of stock options   297   702 
Payment of public offering costs   0     (973
Employee taxes paid related to net share settlement of equity awards   (39  —   
          
Net cash provided by
(used in) 
financing activities
   258   (271)
          
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash   (130  (930)
          
Net
 (decrease)
increase in cash, cash equivalents and restricted cash
   (117,143  571,304 
Cash, cash equivalents and restricted cash - beginning of period   964,903   442,859 
          
Cash, cash equivalents and restricted cash - end of period   847,760   1,014,163 
          
Supplemental disclosure on
non-cash
investing and financing activities:
         
Payables for purchase of property and equipment   668   439 
Payables for intangible assets   73   26 
Payables for public offering costs   0     26 
Payables for treasury stock

  
55

   
—  

 
Supplemental disclosure of cash flow information:
         
Cash and cash equivalents   846,957   1,013,420 
Restricted cash,
non-current
   803   743 
          
Total cash and cash equivalents and restricted cash   847,760   1,014,163 
          
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)

1. Organization and principal activitiesPrincipal Activities
Zai Lab Limited was incorporated on March 28, 2013 in the Cayman Islands as an exempted company with limited liability under the Companies LawAct 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 therapiesproducts and product candidates that address medical conditions with significant unmet medical needs, including in particular,the areas of oncology, autoimmune disorders, infectious diseases, and neuroscience.
The Company’s principal operations and geographic markets are in mainland China, Hong Kong, Macau and Taiwan (hereinafter collectively referred to as “Greater China”).Greater China. The Company 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 accompanying unaudited condensed consolidated financial statements are the financial statements of the CompanyCompany.
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 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 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 opinionthird quarter of management, these2022, 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 and accrualsthat are necessary to present fairly the results for a fair statement of the Company’s unaudited condensed consolidated financial statements for such periods. Theinterim periods presented. Interim results of operations for any interim period are not necessarily indicative of the results for the full year. Theyear ending December 31, 2021 condensed consolidated balance sheet 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-K2023.
for the year ended December 31, 2021.
Interim results are not necessarily indicative of full year results and the unaudited condensed consolidated financial statements may not be indicative of the Company’s future performance.
Effective as of March 30, 2022, the Company subdivided each of its issued and unissued ordinary shares into ten ordinary shares (the “Share Subdivision”). Following the Share Subdivision, the Company’s authorized share capital became $30 divided into 5,000,000,000 shares with a par value of US$0.000006 each. The numbers of issued and unissued ordinary shares and per share data as disclosed elsewhere in these unaudited condensed consolidated financial statements and notes thereto are presented on a basis after taking into account the effects of the Share Subdivision and have been retrospectively adjusted, where
applicable. In connection with the Share Subdivision, the conversion ratio of our ADSs to ordinary shares changed from one ADS to one ordinary share to a new ratio of one ADS representing ten ordinary shares (the “ADS Ratio Change”). The Share Subdivision and ADS Ratio Change did not result in any change to the number of outstanding ADSs of the Company.
(b) Principles of consolidationConsolidation
The unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries.Company. All intercompany transactions and balances among the Company and its subsidiaries are eliminated upon consolidation.
(c) Use of estimatesEstimates
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, 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, allocationrebates, recognition of the research and development service 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 assetsassets. These estimates, judgments, and a lack of marketability discount ofassumptions can affect the ordinary shares issued in connection with collaboration and license arrangements (Note 1
2
). 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 valuesreported amounts of assets and liabilities.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.
7

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)
(d) Fair Value Measurements
Equity investments with readily determinable fair value measurements
Asare measured using level 1 inputs and were $6.9 million and $6.4 million as of March 31, 20222023 and December 31, 2021, information about inputs into the2022, respectively. The unrealized gains and losses from fair value measurementchanges are recognized in other income (expenses), net in the consolidated statements of the Company’s assets that are measured at a fair value on a recurring basis in periods subsequent to their initial recognition is as follows:operations.

Description
  
Fair Value as of
March 31, 2022
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   8,444    8,444 
   
Description
  
Fair Value as of
December 31, 202
1

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   15,383    15,383 
The Company does not have assets or liabilities measured at fair value on a nonrecurring basis during the periods presented.
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, 20222023 and December 31, 2021,2022, 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 approximatesapproximated its fair value based on the nature of the assessment of the ability to recover these amounts.
(e) Recent accounting pronouncements
Accounting Pronouncements
Adopted Accounting Standards
In November 2021,There were no standards adopted since the FASB issued ASU2021-10, Government Assistance (Topic 832) — Disclosures by Business Entities about Government Assistance. The amendments in this ASU require disclosures about transactions with a government that have been accounted for by analogizing to a grant or contribution accounting model to increase transparency about (1) the types of transactions, (2) the accounting for the transactions, and (3) the effect of the transactions on an entity’s financial statements. The amendments in this ASU are effective for all entities within their scope for financial statements issued for annual periods beginning after December 15, 2021. The Company adopted this standard as of January 1, 2022. There was no material impact to the Company’s financial position or results of operations upon the adoption.2022 Annual Report.
(f) Significant accounting policiesAccounting 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’s2022 Annual Report on Form
10-K
for the year ended December 31, 2021.
8
Report.

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
3. Cash and Cash Equivalents
The following table presents the Company’s cash and cash equivalents
($ in thousands):
         
   
As of
 
   
March 31, 2022
   
December 31, 2021
 
   
$
   
$
 
Cash at bank and in hand   547,259    663,472 
Cash equivalents (i)   299,698    300,628 
           
    846,957    964,100 
           
Denominated in:          
US$   782,295    932,888 
RMB (ii)   58,569    23,791 
Hong Kong dollar (“HK$”)   5,551    6,674 
Australian dollar (“A$”)   495    475 
Taiwan dollar (“TW$”)   47    272 
           
    846,957    964,100 
           
Notes:
March 31, 2023December 31, 2022
Cash at bank and in hand878,786 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.
(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.
(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 of $20,288was $38.4 million and $18,951$31.6 million as of March 31, 20222023 and December 31, 2021,2022, respectively, and mainly consisted of finished goods purchased from Tesaro Inc., now
GlaxoSmithKline (“GSK”), for distribution in Hong Kong, and 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.
8
         
   
As of
 
   
March

31, 2022
   
December

31, 2021
 
  
$
   
$
 
Finished goods   4,733    5,632 
Raw materials   15,555    13,231 
Work in Progress   0      88 
           
Inventories   20,288    18,951 
           


Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
The following table presents the Company’s inventories, net ($ in thousands):
March 31, 2023December 31, 2022
Finished goods17,832 12,156 
Raw materials20,521 19,029 
Work in Progress52 436 
Inventories, net38,405 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. During the three months ended March 31, 2022 and 2021, theThe Company recorded write-downs of $138 and $43, in cost of revenues,sales of $0.4 million and $0.1 million for the first quarter of 2023 and 2022, respectively.
9


Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
5
. PropertyCompany’s property and equipment, net
($ in thousands):
Property and equipment
, net
March 31, 2023December 31, 2022
Office equipment998 977 
Electronic equipment8,315 7,416 
Vehicle205 202 
Laboratory equipment19,491 18,726 
Manufacturing equipment16,763 17,055 
Leasehold improvements11,470 11,300 
Construction in progress25,546 24,251 
82,788 79,927 
Less: accumulated depreciation(24,479)(22,064)
Property and equipment, net58,309 57,863 
consist of the following:
         
   
As of
 
   
March 31,

2022
   
December 31,

2021
 
  
$
   
$
 
Office equipment   838    836 
Electronic equipment   5,932    5,036 
Vehicle   222    220 
Laboratory equipment   18,130    17,069 
Manufacturing equipment   14,721    14,600 
Leasehold improvements   10,506    10,432 
Construction in progress   13,126    11,334 
           
    63,475    59,527 
Less: accumulated depreciation   (18,248   (16,425
           
Property and equipment, net   45,227    43,102 
           
Depreciation expensesexpense was $2.5 million and $1.9 million for the three
months 
ended March 31,first quarter of 2023 and 2022, and 2021 were $1,869 and $1,340, respectively.
6. Revenue
Product revenue, net
Revenue
The Company’s
product
revenue is primarily derived from the salesales of ZEJULA, Optune, QINLOCK, and NUZYRA in mainland China and Hong Kong. The table below presents the Company’s net product sales for the three months ended March 31, 2022 and 2021.revenue ($ in thousands):
Three Months Ended March 31,
20232022
Product revenue - gross71,212 53,310 
Less: Rebates and sales returns(8,415)(7,215)
Product revenue - net62,797 46,095 
         
   
Three Months Ended March 31,
 
   
2022
   
2021
 
   
$
   
$
 
Product revenue - gross   53,310    46,555 
Less: Rebate and sales return   (7,215   (26,452
           
Product revenue - net   46,095    20,103 
           
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.
Due to the inclusion of ZEJULA in the National Reimbursement Drug List (“NRDL”)  in December 2020 and December 2021 for certain therapies, the Company accrued sales rebates
of
$2,587 and $22,009 compensation to distributors for those products previously sold at the price prior to the NRDL implementation, for the three months ended March 31, 2022 and 2021,
respectively.
The following table disaggregates net revenue by product for the three
months 
ended March 31, 2022 and 2021:
         
   
Three Months Ended March 31,
 
   
2022
   
2021
 
   
$
   
$
 
ZEJULA   29,597    12,606 
Optune   12,797    7,130 
QINLOCK   2,959    367 
NUZYRA   742    0   
           
Product revenue - net   46,095    20,103 
           
1
09

Table of Contents

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
The following table presents the Company’s net revenue by product ($ in thousands):
Three Months Ended March 31,
20232022
ZEJULA42,680 29,597 
Optune13,342 12,797 
QINLOCK1,306 2,959 
NUZYRA5,469 742 
Product revenue - net62,797 46,095 
Collaboration revenue
The Company’s collaboration revenue for the three months ended March 31, 2022 amounted to $629 was from the
collaborative arrangement with Huizheng (Shanghai) Pharmaceutical Technology Co., Lt
d.
7. Income Tax
No provision for income taxes has been required to be accrued because the Company and all of its subsidiaries are in cumulative loss positions for all the periods presented.
The Company recorded a full valuation allowance against deferred tax assets of all its consolidated entities because all entities were in a cumulative loss position as of March 31,
2022 2023 and December 31, 2021. NaN2022. No unrecognized tax benefits and related interest and penalties were recorded in any of the periods presented.
8. Other current liabilities
Current Liabilities
OtherThe following table presents the Company’s other current liabilities consist($ in thousands):
March 31, 2023December 31, 2022
Payroll11,472 31,689 
Accrued professional service fee7,148 4,080 
Payables for purchase of property and equipment4,232 5,269 
Accrued rebate to distributors11,536 8,443 
Tax payables13,001 13,283 
Others (i)3,492 4,054 
Total50,881 66,818 
(i)Others mainly include accrued travel and business-related expenses.
9. Loss Per Share
The following table presents the computation of the following:
         
   
As of
 
   
March 31,

2022
   
December 31,

2021
 
   
$
   
$
 
Payroll    16,318    25,685 
Accrued professional service fee   5,170    4,319 
Payables for purchase of property and equipment   668    2,568 
Accrued rebate to distributors   14,625    15,001 
Tax payables   9,931    8,817 
Others (note (i))   3,244    4,421 
           
Total   49,956    60,811 
           
Note:
(i)Others are mainly payables to employees for exercising the share-based compensations, payables related to travel and business entertainment expenses.
9
. Loss per share
Basicbasic and diluted net loss per share for each of the period presented are calculated as follows:
         
   
Three Months Ended
March 31,
 
   
2022
   
2021
 
   
$
   
$
 
Numerator:          
Net loss attributable to ordinary shareholders   (82,394   (232,910
Denominator:          
Weighted average number of ordinary shares- basic and diluted   955,499,030    883,749,280 
           
Net loss per share - basic and diluted   (0.09   (0.26
           
11

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In($ in thousands, of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of sharesshare and per share data)
:
Three Months Ended March 31,
20232022
Numerator:
Net loss attributable to ordinary shareholders(49,144)(82,394)
Denominator:
Weighted average number of ordinary shares - basic and diluted961,444,780 955,499,030 
Net loss per share - basic and diluted(0.05)(0.09)
As
a result of the Company’s net loss for the three months ended March 
31
,
first quarter of 2023 and 2022,
and
2021
, 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
10


Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
would have been anti-dilutive.
March 31
20232022
Share options86,242,060 80,514,330 
Non-vested restricted shares32,154,670 9,846,360 
         
   
As of
 
   
March 31,

2022
   
March 31,

2021
 
Share options   80,514,330    86,932,740 
Non-vested
restricted shares
   9,846,360    4,800,100 
10. Related party transactions​​​​​​​
Related-Party Transactions
The table below sets forth the major related party and the relationship with the Company as of March 31, 2021:
Company Name
Relationship with the Company
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 months ended March 31, 2022 and 2021, the Company incurred $74 and $103 research and development
expenses for product research and development services provided by
MEDx (Suzhou) Translational Medicine Co., Ltd
. (“MEDx”),
over which an immediate family member of our Chief Executive Officer and Chairperson of the Board held significant influence. The Company incurred development expenses with MEDx of nil and $0.1 million during the first quarter of 2023 and 2022, respectively.
1
1
. Share-based compensation
Share options
11. Share-Based Compensation
OnIn March 5, 2015, the Board of Directors of the Company approved an Equity Incentive Plan (the “2015 Plan”), pursuant to which is administered by the Board of Directors. Under the 2015 Plan, the Board of Directors maycould grant options to purchase ordinary shares to management including officers, directors, employees, and individual advisors who renderrendered services to the Company to purchase an aggregate of no more than 41,409,450 ordinary shares of the Company (“Option Pool”). Subsequently, the Board of Directors approved the increaseCompany. In August 2017, in the Option Pool to 73,697,670 ordinary shares.
In connection with the completion of the Company’s initial public offering on Nasdaq (the “IPO”), the Board of Directors approved the 2017 Equity Incentive Plan (the “2017 Plan”) and all. All equity-based awards subsequent to the IPO would be granted under the 2017 Plan.
The 2017 Plan providesprovided for an automatic annual increase to the number of ordinary shares reserved under the 2017 Plan on each January 1st between January 1, 2018 and January 1, 2027 equal to the lesser of 4% of the number of ordinary shares outstanding as of the close of business on the immediately prior December 31st or such number as approved by the Board on or prior to such date each year. Accordingly, on January 1,
On June 22, 2022, at the number2022 Annual General Meeting of shares reserved under the 2017 Plan
increased by 38,563,500. The aggregate number of shares reserved and available for issuance under our 2017 Plan as of April 1, 2022 was
75,562,170.
On April 20, 2022, the Board of DirectorsShareholders of the Company, the Company’s shareholders approved the Zai Lab Limited 2022 Equity Incentive Plan (the “2022 Plan”), which iswas previously approved by the Board of Directors on April 20, 2022, conditioned on and subject to (i) the dual-primarydual primary listing of the Company on the Main Board of The Stock Exchange of Hong Kong Limited becoming effective(the “Hong Kong Stock Exchange”) and shareholder approval at the annual general meeting scheduled on June 22, 2022, and subject to(ii) the granting of thea waiver on Note 1 to Rule 17.03(9) of the HKRules Governing the Listing Rules byof Securities on The Stock Exchange of Hong Kong Limited. If approvedThe Company’s voluntary conversion of its secondary listing status to primary listing status on the Hong Kong Stock Exchange became effective on June 27, 2022, and adopted,the waiver was granted to the Company in connection with the primary conversion. As such, the 2022 Plan became effective on June 27, 2022, and the aggregate number of shares that may be delivered in satisfaction of awards under the 2022 Plan is 97,908,743 ordinary shares. Once the 2022 Plan becomes effective, noshares as of June 22, 2022. No new grants will be made under the 2015 Plan or the 2017
Plan.
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)
For
the three months ended March 31, 2021, the Company granted 151,000 share options to certain management and employees Plan as of the Company ateffective date of the exercise price $16.20 per share under the 20172022 Plan. These
The options granted have a contractual term of ten years and generally vest ratably over a five-year period, with 20% of the awards vesting beginningon each anniversary of the grant date, subject to continued employment with the Company on the vesting date. The restricted shares granted generally vest ratably over a specified period on the anniversary date one year afterof the grant date.
For the three months ended March 31, 2022,date, subject to continued employment/service with the Company granted 984,310on the vesting date. The shares underlying restricted share optionsgrants represent shares not yet vested until they have met related consideration or vesting requirements, which are generally continued employment/service to certain management and employees of the Company at the exercise price ranging from $5.26 to $6.29 per share under the 2017 Plan. These options granted have a contractual termor satisfaction 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 three months ended March 31, 2022 and 2021 were $3.24
and $9.88 per share, respectively. The Company recorded compensation expense related to the options of $7,207 and $5,549 for the three months ended March 31, 2022 and 2021, respectively, which were classified in the accompanying unaudited condensed consolidated statements of operations as follows:
         
   
Three Months Ended March 31,
 
   
2022
   
2021
 
   
$
   
$
 
Selling, general and administrative   4,069    3,259 
Research and development   3,138    2,290 
           
Total   7,207    5,549 
           
As
of March 
31
,
2022
, there was $
89,126
of total unrecognized compensation expense related to unvested share options granted. That cost is expected to be recognized over a weighted-average period of
2.79
years which is determined based on the number of
unvested 
shares and unrecognized years.
Non-vested restricted shares
For the three months ended March 31, 2021, 192,600 ordinary shares were authorized for grant to the independent directors.specified performance conditions. The restricted shares will vest and be released from the restrictions in full on the first anniversary from the date of the agreement.once they vest. Upon termination of the independent directors’award holders’ service with the Company for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.forfeited unless otherwise set forth in an agreement between the Company and the award holder.
For the three months ended March 31, 2021, 31,000 ordinaryUpon each settlement date of certain share-based awards, shares were authorized for grantwithheld to certain management. One-fifthcover the required withholding tax, which was based on the value of a share on the settlement date as determined by the applicable price of the ADSs on the trading day of the applicable settlement date. The remaining shares after the withholding were delivered to the recipient. The amount remitted to the tax authorities for employee tax obligations was reflected as a financing activity on the consolidated statements of cash flows. These shares withheld by the Company as a result of the net settlement were accounted for as treasury stock and considered issued but not outstanding.
During the first quarter of 2023, the Company granted 92,640 share options and 266,570 non-vested restricted shares will vestunder the 2022 Plan. The share options were granted at an exercise price of $3.99 per share. The share options granted were valued using the Black-Scholes model, 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 Company for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
For the three months ended March 31, 202
2
, 388,150 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 Company for any reason, any shares that are outstanding and not yet vested will be immediately
forfeited.
grant-date fair value was $2.70 per share.
11
13

Table of Contents

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
For
the three months ended March 31, 2022, 477,150 ordinary shares were authorized for grant to certain management. One-fifth of the restricted shares will vest and be released from the restrictions on each yearly anniversary from the date of the agreement. Upon termination of the certain management’s service with the Company for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
The Company measuredfollowing table presents the fair value of the
non-vested
restricted shares as of respective grant dates and recognized the amount asstock-based compensation expense overthat has been reported in the deemed service period using a graded vesting attribution model on a straight-line basis.Company’s condensed consolidated statements of operations and comprehensive loss as follows ($ in thousands):
Three Months Ended March 31,
20232022
Selling, general and administrative10,063 6,992 
Research and development6,598 5,418 
Total16,661 12,410 
As of March 31, 2022,2023, there was $68,292 of total unrecognized share-based compensation expense related to
non-vested
restricted shares. The Company recorded compensation expense related to the unvested share options and unvested restricted shares of
$
5,203 $90.9 million and $1,769 for the three months ended March 31, 2022 and 2021,$117.6 million, respectively, which were classified in the accompanying unaudited condensed consolidated statementsCompany expects to recognize over a weighted-average period of operations as follows:3.39 years and 3.38 years, respectively.
         
   
Three Months Ended March 31,
 
   
2022
   
2021
 
   
$
   
$
 
Selling, general and administrative   2,923    1,211 
Research and development   2,280    558 
           
Total   5,203    1,769 
           
12. LicensesLicense and collaborative arrangements pursuantCollaboration Agreements
The Company may enter into collaboration agreements with third parties to which milestone payments were made
The following islicense intellectual property. For a description of the Company’s significant ongoing collaboration agreements under which the Company has made milestone payments for the three months ended March 31, 2022.
Collaboration
and license agreement with argenx BV (“argenx”)
In January 2021, the Company entered into a collaboration and license agreement with argenx. The Company received an exclusive license to develop and commercialize products containing argenx’s proprietary antibody fragment, known as efgartigimod, in Greater China. The Company 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 Company and argenx. As the upfront payment to argenx, the Company issued 5,681,820 ordinary shares of the Company to argenx with par value $0.000006 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. 
In addition, the Company made a
non-creditable,
non-refundable
development cost-sharing payment of $75,000 to argenx during the first quarter in 2021 to argenx. During the three months ended March 31, 2022, the Company made a milestone payment of $25,000 to argenx due to the first regulatory approval by the U.S. Food and Drug Administration (“FDA”) in December 2021 for VYVGART (efgartigimod alfa-fcab). The Company recorded these expenses in research and development expenses. Argenx is also eligible to receive 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.
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)
License and collaboration agreement with Paratek Bermuda Ltd. (“Paratek”)
In April 2017, the Company entered into a license and collaboration agreement with Paratek Bermuda Ltd., a subsidiary of Paratek Pharmaceuticals, Inc., pursuant to which it obtained both an exclusive license under certain patents and know-how of Paratek and an exclusive sub-license under certain intellectual property that Paratek licensed from Tufts University to develop, manufacture and commercialize products containing omadacycline (ZL-2401) as an active ingredient in Greater China in the field of all human therapeutic and preventative uses other than biodefense. Under certain circumstances, the exclusive sub-license to certain intellectual property Paratek licensed from Tufts University may be converted to a non-exclusive license if Paratek’s exclusive license from Tufts University is converted to a non-exclusive license under the Tufts Agreement. The Company also obtained the right of first negotiation to be Paratek’s partner to develop certain derivatives or modifications of omadacycline in our licensed territory. Paratek retains the right to manufacture the licensed product in our licensed territory to support development and commercialization of the same outside our licensed territory. The Company also granted to Paratek a non-exclusive license to certain of our intellectual property. Under the agreement, the Company agreed not to commercialize certain competing products in our licensed territory.
Under thematerial terms of the agreement, the Company made an upfront payment of $7,500
to Paratek in 2017, $5,000 upon approval by the FDA of a New Drug Application (“NDA”) submission in 2018, $3,000 upon submission of the first regulatory approval application for a licensed product in the People’s Republic of China in 2020. The Company made another milestone payment of $6,000 during the three months ended March 31, 2022 upon regulatory approval of omadacycline for the treatment of adults with Acute Bacterial Skin and Skin Structure Infections (“ABSSSI”) and Community-Acquired Bacterial Pneumonia (“CABP”) in the People’s Republic of China in December 2021.The Company may be required to pay further commercial milestone payments of up to an aggregate of
$40,500 to Paratek for the achievement of certain development and sales milestone events. In addition, the Company will pay to Paratek tiered royalties on the net sales of licensed products, until the later of the abandonment, expiration or invalidation of the last-to-expire licensed patent covering the licensed product, or the eleventh anniversary of the first commercial sale of the licensed product, in each case on a product-by-product and region-by-region basis.
The
Company has the right to terminate this agreement at any time by providing written notice of termination to Paratek.
Full details of the licenses and collaborative arrangements are included in the notes to financial statements in our Annual Report on Form
10-K
for the year ended December 31, 2021 as filed with the SEC on March 1, 2022. As noted above, the Company has entered into variousCompany’s significant license and collaboration agreements, with third party licensorssee Note 16 to develop and commercialize product candidates. Based onour 2022 Annual Report. During the termsfirst quarter of these agreements,2023, the Company is contingently obligated to make additional material payments upon the achievement of certain contractually defined milestones. Based on management’s evaluation of the progress of each project noted above, the licensors will be eligible to receive fromdid not enter into any new significant license or collaboration agreements, and the Company up to an aggregate of approximatelydid not pay or accrue any material upfront or milestone fees for our existing significant license and collaboration agreements.
$5,589,801
13. Other Income (Expenses), Net
The following table presents the Company’s other income (expenses), net ($ in future contingent milestone payments dependent upon the achievement of contractually specified development milestones, such as regulatory approval for the product candidates, which may be before the Company has commercialized the product or received any revenue from sales of such product candidate. These milestone payments are subject to uncertainties and contingencies and may not occur.
thousands):
Three Months Ended March 31,
20232022
Government grants— 1,576 
Gain (loss) on equity investments with readily determinable fair value441 (6,939)
Others miscellaneous gain793 481 
Total1,234 (4,882)
13.14. Restricted net assets​​​​​​​Net Assets
The Company’s ability to pay dividends may depend on the Company receiving distributions of funds from its Chinese subsidiaries. Relevant Chinese laws and regulations permit payments of dividends by the Company’s Chinese subsidiaries only out of its retained earnings, if any, as determined in accordance with Chinese accounting standards and regulations. The results of operations reflected in the unaudited condensed consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s Chinese subsidiaries.
subsidiaries.
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)
In
accordance with the Company Law of the People’s Republic of China, a domestic enterprise is required to provide statutory reserves of at least 10% of its annual
after-tax
profit until such reserve has reached 50%
of its respective registered capital based on the enterprise’s Chinese statutory accounts. A domestic enterprise may provide discretionary surplus reserve, at the discretion of the Board of Directors, from the profits determined in accordance with the enterprise’s Chinese statutory accounts. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. The Company’s Chinese subsidiaries were established as domestic enterprises and therefore are subject to the above-mentioned restrictions on distributable profits.
During the three months ended March 31, 2022 and 2021, 0No appropriation to statutory reserves was made during the first quarter of 2023 and 2022 because the Chinese subsidiaries had substantial losses during such periods.
12


Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
As a result of these Chinese laws and regulations, subject to the limits discussed above that require annual appropriations of 10% of
after-tax
profit to be set aside, prior to payment of dividends, as a general reserve fund, the Company’s Chinese subsidiaries are restricted in their ability to transfer out a portion of their net assets to the Company.assets.
Foreign exchange and other regulation in mainland China may further restrict the Company’s Chinese subsidiaries from transferring out funds to the Company in the form of dividends, loans, and advances. As of March 31, 20222023 and December 31, 2021,2022, amounts restricted are the
paid-in
capital of the Company’s Chinese subsidiaries, which both amounted to $406,010.$456.0 million.
14.15. Commitments and Contingencies
(a) Purchase commitments
Commitments
As of March 31, 2022, theThe Company’s commitments related to purchase of property and equipment contracted but not yet reflected in the unaudited condensed consolidated financial statementstatements were $22,294 which is$6.0 million as of March 31, 2023 and were expected to be incurred within one year.
(b) ContingenciesLegal Proceedings
The Company is not currently a party to or assigneeany material legal proceedings.
(c) Indemnifications
In the normal course of license and collaborationbusiness, the Company enters into agreements that indemnify others for certain liabilities that may require itarise in connection with a transaction or certain events and activities. To date, the Company has not paid any claims or been required to make future payments relatingdefend any action related to milestone fees and royalties on future sales of licensed products (Note 1
2
).
its indemnification obligations.
15. Subsequent Event
From April 1, 2022 to May 5, 2022, the Company granted 16,614,930 shares of stock options to certain management and employees of the Company at exercise prices ranging from $3.96 to $4.55 per share under the 2017 Plan. These options granted have a contractual term of ten years and generally vest over a 5-year period, with 20% of the awards vesting beginning on the anniversary date one year after the grant date. During the same period, the Company also granted 5,173,390 restricted ordinary shares to certain management and employees of the Company. One-fifth of the restricted shares will vest on each yearly anniversary from the date of the agreement. Upon termination of the optionees’ service with the Company for any reason, any unvested shares will be immediately forfeited.
16
13

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our 2022 Annual Report and our unaudited condensed consolidated financial statements and the accompanying notes included in “Item 1. Financial Statements” in this report.
Overview
We are a patient-focused, innovative, commercial-stage, global biopharmaceutical company with a substantial presence in both Greater China and the United States. We are focused on discovering, developing, and commercializing innovative products that targetaddress medical conditions with significant unmet needs affecting patients in Greater China and worldwide, particularly in the areas of oncology, autoimmune disorders, infectious diseases, and neuroscience. As of May 5, 2022, weWe intend to leverage our competencies and resources to positively impact human health in Greater China and worldwide. We currently have four commercializedcommercial products – ZEJULA, Optune, QINLOCK, and NUZYRA – that have received marketing approval in one or more territories in Greater China and twelvethirteen programs in late-stage product development.
Since our inception, we have incurred net losses and negative cash flows from our operations. Substantially all of our losses have resulted from funding our research and development programs and general and administrative costs associated with our operations. Developing high quality product candidates requires a significant investment related toin our research and development activities over a prolonged period of time, and a core part of our strategy is to continue making sustained investments in this area. Our ability to generate profits and to generate positive cash flow from operations over the next several years depends upon our ability to successfully market our four commercial products – ZEJULA, Optune, QINLOCK and NUZYRA –to successfully expand the indications for these products and develop and commercialize our other product candidates that we are able to successfully commercialize.candidates. We expect to continue to incur substantial expenses related to our research and development activities. In particular, our licensing and collaboration agreements require us to make upfront payments upon our entry into such agreements and milestone payments upon the achievement of certain development, regulatory, and commercialsales-based milestones as well as certain royalties at tiered royaltiespercentage rates based on theannual net sales of the licensed products. These upfront payments and milestone payments uponproducts in the achievementlicensed territories. We recorded $1.0 million of certain development and regulatory milestones are recorded in research and development expense in our unaudited condensed consolidated financial statements. We did not accrue any such paymentsrelated to upfront license fees and development milestones during the three months ended March 31, 2022.first quarter of 2023. In addition, we expect to incur substantial costs related to the commercialization of our product candidates, in particular during the early launch phase.
Furthermore, asAs we pursue our strategy of growth and development, we anticipate that our financial results will fluctuate from quarter to quarter based uponand year to year depending in part on the balance between the successful marketingsuccess of our commercial products and the level of our significant research and development expenses. We cannot predict whether or when new products orin our pipeline, including new indications for marketedour current commercial products, will receive regulatory approval. Further, if we receive such regulatory approval, we cannot predict whether or if any such approval is received, whetherwhen we willmay be able to successfully commercialize such product(s) andproduct or whether or when theysuch product may become profitable.
Recent Developments
Commercial Products
Recent Business Developments
We continued to increase access to our commercial products, including through increased sales for ZEJULA, new NRDL listings for QINLOCK and NUZYRA and increased supplemental insurance plan listings for Optune:
OnSales Growth for ZEJULA: Net product revenues for ZEJULA continued to increase in the first quarter of 2023, growing 44% compared to the first quarter of 2022.
National Drug Reimbursement List (NRDL) Implementation: In January 6, 2022, we announced that2023, QINLOCK was included in the NMPA accepted the new drug application (NDA)NRDL for margetuximab, an investigational,
Fc-engineered
monoclonal antibody that targets HER2. The margetuximab NDA isfourth-line treatment of advanced gastrointestinal stromal tumor patients and NUZYRA was included for the treatment of adult patientsadults with community-acquired bacterial pneumonia and acute bacterial skin and skin structure infections. The updated NRDL officially took effect on March 1, 2023.
Supplemental Insurance Plan Coverage: As of March 31, 2023, Optune was listed in 96 regional customized health insurance plans guided by provincial or municipal governments throughout mainland China, or supplemental insurance plans, up from 87 as of December 31, 2022 and 37 as of March 31, 2021.
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Product Candidates
We continued to advance our product candidates through our research and development and commercial operations, including the following developments with respect to our clinical trials, regulatory approvals, and commercialization efforts:
Oncology
TIVDAK® (Tisotumab Vedotin, Antibody Drug Conjugate (“ADC”)): In April 2023, Zai Lab partner Seagen Inc. (“Seagen”) presented the interim analysis for the Phase II innovaTV 207 study in head and neck cancer at the 2023 American Association of Cancer Research (“AACR”) Annual Meeting. At data cutoff (November 28, 2022), confirmed objective response rate (“ORR”) was 40% (95% confidence interval (“CI”): 16.3, 67.7), with 1 complete response and 5 partial responses. The safety profile was generally consistent with that observed across TIVDAK monotherapy clinical studies. In addition, in February 2023, Seagen completed global target patient enrollment for the Phase III confirmatory innovaTV 301 study in second- or third-line recurrent or metastatic HER2-positive breast cancer who have received two or more prior anti-HER2 regimens, at least one of which was for metastatic disease,cervical cancer. We are participating in combination with chemotherapy.
On January 12, 2022, we announced treatment of the first patientglobal trial and ongoing extension study in Greater ChinaChina.
KRAZATI® (Adagrasib, KRASG12C): In April 2023 and May 2023, our partner Mirati Therapeutics, Inc. (“Mirati”) announced the inclusion of adagrasib as the only KRAS inhibitor in the
PANOVA-3
trial, a Phase 3 pivotal trial of Tumor Treating Fields in patients with pancreatic cancer.
PANOVA-3
is a global, open-label, randomized Phase III trial evaluating the efficacy of TTFields administered concomitantly with gemcitabine and
nab-paclitaxel
as front-line treatment National Comprehensive Cancer Network (“NCCN”) Guidelines for Central Nervous System (“CNS”) Cancers for patients with unresectable, locally advancedKRAS
G12C-mutated non-small cell lung cancer (“NSCLC”) with CNS metastases and for KRASG12C-mutation positive pancreatic cancer. The primary endpoint is overall survival. Secondary endpoints include progression-free survival, local progression-free survival, objective response rate,
one-year
survival rate, qualityadenocarcinoma cancer patients, respectively. Also, in April 2023, Mirati presented updated clinical data for adagrasib as a targeted treatment for pancreatic ductal adenocarcinoma, biliary tract cancer, and other solid tumors harboring a KRAS
G12C mutation at the 2023 American Society of life, pain-free survival, resectability rateClinical Oncology (“ASCO”) Plenary series. Data was concurrently published in the Journal of Clinical Oncology.
Bemarituzumab (FGFR2b): In March 2023, we obtained Clinical Trial Application (“CTA”) approval for the Phase III FORTITUDE-101 study of bemarituzumab plus chemotherapy, versus placebo plus chemotherapy, in first-line gastric cancer with FGFR2b overexpression.
Odronextamab (CD20xCD3): In March 2023, we completed enrollment in China for the registrational global Phase II ELM-2 trial in B-cell non-Hodgkin lymphoma.
ZL-2313 (BLU-945, EGFR): In April 2023, our partner Blueprint Medicines Corporation (“Blueprint”) presented novel real-world data showing first-line osimertinib had worse outcomes in EGFR L858R+ vs. ex19del+ NSCLC at the 2023 AACR Annual Meeting. Data also demonstrated additive effects of ZL-2313 with osimertinib in preclinical models of tumor progression, reinforcing the clinical need addressed by the SYMPHONY study in first-line EGFR L858R+ NSCLC.
ZL-1211 (Claudin18.2, Global Rights): In April 2023, we presented new data including a translational and toxicity.biomarker data analysis at the 2023 AACR Annual Meeting.
Autoimmune Disorders, Infectious Diseases, and Neuroscience
Sulbactam-Durlobactam (SUL-DUR, Asia Pacific Rights):In February 2022,April 2023, our partner Entasis Therapeutics, Inc. (“Entasis”), a wholly owned subsidiary of Innoviva, Inc., announced that the CenterFDA’s Antimicrobial Drugs Advisory Committee unanimously voted in support of approval of its New Drug Application (“NDA”) for Drug Evaluation (CDE)SUL-DUR based on a favorable benefit-risk assessment of the NMPA granted Breakthrough Therapy Designation for repotrectinibSUL-DUR for the treatment of patientsadults with ROS1-positive metastatic NSCLC who have not been treated with a ROS1 TKI. The breakthrough therapy designation was supportedhospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia caused by the initial data from both global and Chinese
TKI-naïve
ROS1-positive NSCLC patients enrolledsusceptible strains of Acinetobacter baumannii-calcoaceticus complex (“Acinetobacter”). We participated in the global Phase I/II
TRIDENT-1
study. We plan to participateIII registrational ATTACK trial in all cohorts ofGreater China, and the global
TRIDENT-1
study.NMPA accepted our NDA in February 2023, after granting priority review in January 2023.
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KarXT (Xanomeline-Trospium, M1/M4-Preferring Muscarinic Acetylcholine Receptor): In March 2022, we presented2023, our partner Karuna Therapeutics, Inc. announced positive results from the Phase 3 PRIME studyIII EMERGENT-3 trial of ZEJULA (niraparib) as maintenance therapy at the Society of Gynecologic Oncology (SGO) 2022 Annual Meeting. ZEJULA demonstratedKarXT in schizophrenia. The trial met its primary endpoint, with KarXT demonstrating a statistically significant and clinically meaningful improvement8.4-point reduction in progression-free survival (PFS)Positive and Negative Syndrome Scale (PANSS) total score compared to placebo (-20.6 KarXT vs. -12.2 placebo; p<0.0001) at Week 5 (Cohen’s d effect size of 0.60). Consistent with prior trials, KarXT demonstrated an early and sustained statistically significant reduction of symptoms from Week 2 (p<0.05) through the end of the trial as assessed by PANSS total score. The pharmacokinetic (PK”) study in mainland China is ongoing, and the CTA for a registrational bridging study in mainland China was approved in January 2023.
15


Corporate Updates
We continued to enhance our portfolio through strategic partnerships and to strengthen our organizational structure to support the evolving needs of our business:
Business Development: In April 2023, we entered into a strategic partnership and global license agreement with MediLink Therapeutics (Suzhou) Co., Ltd. (“MediLink”). Through this collaboration, we expanded our lung cancer franchise and global oncology pipeline with a tolerable safety profilenext generation DLL3 ADC program, ZL-1310. DLL3 is an inhibitor of the Notch ligand that is overexpressed in Chinese patients with newly diagnosed advanced epithelial ovarian, fallopian tube, or primary peritonealsmall cell lung cancer (collectively termed as ovarian cancer) followingand neuroendocrine tumors. ZL-1310 has demonstrated an encouraging pre-clinical profile. ZL-1310 is progressing to the clinical stage, and we plan to focus on advancing its global development.
Organizational Update: As we enter into a responsestage of further growth, productivity, and global opportunities, we have promoted Joshua Smiley to platinum-based chemotherapy, regardlessthe role of biomarker status. InPresident and Chief Operating Officer, effective April 1. Mr. Smiley joined the PRIME study, median PFS was significantly longer for patients treated with niraparib compared to placebo: 24.8 months versus 8.3 months, hazard ratio (HR), 0.45; p<0.001.
We also continued to strengthen and expand our leadership team. On March 15, 2022, we announced the appointment of Joshua SmileyCompany as our Chief Operating Officer effective onin August 1, 2022. He is responsible for our corporate strategy and for overseeing our commercial, manufacturing, business development, finance, human resources, information technology, and corporate affairs functions. In this new role, Mr. Smiley brings over 26 yearswill further help our leadership team enter and better anticipate the strategic and operational needs of experience working with the biopharmaceutical industry, including experience leading finance, corporate strategy, business development, venture capital and global business services operations at Eli Lilly and Company. In addition, in April 2022, Jonathan Wang became our Chief Business Officer, taking on increased responsibilities after the departurethis next period of Tao Fu, our former Chief Strategy Officer.
In March 2022, our shareholders approved a Share Subdivision whereby the Company subdivided each of its issued and unissued ordinary shares into ten ordinary shares, effective March 30, 2022. The
one-to-ten
Share Subdivision increased the number of our ordinary shares in issue and reduced the nominal value and trading price of each ordinary share. Our Board of Directors believes that the Share Subdivision will increase the trading liquidity of the ordinary shares, lower the investment barrier, and attract more investors to trade in the ordinary shares. In connection with the Share Subdivision, the Company also effected the ADS Ratio Change, whereby the conversion ratio of our ADSs to ordinary shares changed from one ADS to one ordinary share to a new ratio of one ADS representing ten ordinary shares. The Share Subdivision and ADS Ratio Change did not result in any change to the number of outstanding ADSs of the Company.
In March 2022, SEC staff conclusively identified us under the HFCAA as a “Commission-Identified Issuer” because Deloitte Touche Tohmatsu Certified Public Accountants LLP and Deloitte Touche Tohmatsu (together, “Deloitte”), our auditorgrowth for the financial statements included in our 2021 Annual Report, is located in a foreign jurisdiction and the PCAOB has determined that it is unable to inspect or investigate the auditor completely because of a restriction imposed by a
non-U.S.
authority in the auditor’s local jurisdiction. In April 2022, the Audit Committee of our Board of Directors approved the engagement of KPMG, an auditor located in the United States that is subject to PCAOB inspection, as our independent registered public accounting firm for the fiscal year ending December 31, 2022. KPMG will be engaged to audit our annual consolidated financial statements filed with the SEC and our internal controls over financial reporting in accordance with the Exchange Act. KPMG also will be engaged to audit our consolidated financial statements submitted to The Hong Kong Stock Exchange in accordance with the Rules Governing the Listing of Securities of the Hong Kong Stock Exchange, subject to our receipt of the requisite approvals from the Hong Kong Stock Exchange and the Financial Reporting Council of Hong Kong (“FRC”), which are expected to be administrative in nature. KPMG is in the process of concluding its standard client evaluation procedures, including obtaining approval from the Hong Kong Stock Exchange to be appointed as our auditor. Upon completion of these standard procedures, KPMG will be in a position to execute an engagement letter and formally commence the engagement. For more information on the HFCAA and risks related to audits of companies with significant operations in China, see “Item 1A. Risk Factors” in this Quarterly Report on Form
10-Q.
Company.
In April 2022, we presented new data from its internal oncology discovery portfolio at the American Association for Cancer Research (AACR) Annual Meeting 2022. Key early-stage discovery programs were featured in these presentations, including first preview of preclinical data on
ZL-1218
(a novel anti-CCR8 antibody for solid tumors) in oral presentation, as well as poster presentations featured
ZL-1201
(a CD47-targeting antibody for advanced hematologic malignancies and solid tumors),
ZL-1211
(a
Claudin18.2-specific
antibody for gastric and pancreatic cancer) and
ZL-2201
(a highly selective small-molecule
DNA-PK
inhibitor for anti-cancer therapy).
In April 2022, we announced topline data for repotrectinib within the China region from the previously disclosed Phase 1/2
TRIDENT-1
study dataset. We plan to discuss topline TKI-naïve data with Chinese health authority in the fourth quarter of 2022.
In TKI-naïve patients
(EXP-1),
in 71 total patients, there was a confirmed objective response rate (cORR) of 79% across the global trial. Ten of 11 patients responded within China for a cORR of 91% (95% CI: 59,100) and DOR ranged from 3.6+ to 7.5+ months with a median duration of follow-up of 3.7 months.
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In patients previously treated with 1 TKI and platinum-based chemotherapy
(EXP-2),
in 26 total patients, there was a cORR of 42% across the global trial. Two of 3 patients responded within China for a cORR of 67% (95% CI:9,99) and DOR ranged from 3.6+ to 3.7+ months with a median duration of follow-up of 3.7 months.
In patients previously treated with two TKIs without prior chemotherapy (EXP-3), in 18 total patients, there was a cORR of 28% across the global trial. Two of 4 patients responded within China for a cORR of 50% (95% CI: 7,93) and DOR ranged from 1.9+ to 3.4+ months with a median duration of follow-up of 2.6 months.
In patients previously treated with 1 TKI without prior chemotherapy (EXP-4), in 56 total patients, there was a cORR of 36% across the global trial. Four of 11 patients responded within China for a cORR of 36% (95% CI: 11,69) and DOR ranged from 2.0+ to 3.7+ months with a median duration of follow-up of 3.1 months.
In April 2022, the Board of Directors of the Company authorized the Company’s senior management to proceed with the relevant preparatory work and undertake necessary steps to pursue a voluntary conversion to dual-primary listing on the Hong Kong Stock Exchange. Following the voluntary conversion, the Company’s ordinary shares and American Depositary Shares will continue to be traded on the Hong Kong Stock Exchange and the Nasdaq Global Market, respectively, and remain mutually fungible. Becoming a dual-primary listed company will enable the Company to be eligible for the Hong Kong Stock Exchange Stock Connect, a channel by which investors in mainland China can invest in stocks traded on the Hong Kong Stock Exchange.
Recent Legal and Regulatory Developments
Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments)
On April 2, 2022, the CSRC published the revised Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (the “Draft Archives Rules”).
The Draft Archives Rules require that, in relation to the overseas securities offering and listing activities of Chinese domestic enterprises, such domestic enterprises, as well as securities companies and securities service institutions providing relevant securities services, are required to strictly comply with the relevant requirements on confidentiality and archives management, establish a sound confidentiality and archives system and take necessary measures to implement their confidentiality and archives management responsibilities.
According to the Draft Archives Rules, if during the course of an overseas offering and listing (whether listed directly or indirectly), if a Chinese domestic company needs to publicly disclose or provide, or publicly disclose or provide through its overseas listed entity, to relevant entities or individuals including securities companies, other securities service providers and overseas regulators, any documents and materials that contain relevant state secrets, government department work secrets or that have a sensitive impact (i.e., that are detrimental to national security or the public interest if divulged), the Chinese domestic company should complete the relevant approval/filing and other regulatory procedures stipulated by applicable national regulations.
In addition, the Draft Archives Rules explicitly include within the scope of its supervision overseas accounting firms that engage in auditing business related to overseas securities offering and listings of Chinese domestic enterprises. Overseas accounting firms that engage in auditing business related to overseas securities offering and listings of Chinese domestic enterprises are required to abide by corresponding procedures in accordance with relevant Chinese national regulations.
Amended China Civil Procedure Law
The Civil Procedure Law of the People’s Republic of China, or the China Civil Procedure Law, which was adopted on April 9, 1991 and amended on October 28, 2007, August 31, 2012, June 27, 2017, and December 24, 2021, prescribes the conditionsMeasures for instituting a civil action, the jurisdiction of the people’s courts, the procedures for conducting a civil action and the procedures for enforcement of a civil judgment or ruling. The most recent amendments to the China Civil Procedure Law on December 24, 2021, which came into effect on January 1, 2022, include the following improvements to the civil procedure under China’s current judicial system: (i) with the consent of the parties, civil litigation activities may be conducted online through the information network platform and such online litigation activities have the same legal effect as offline litigation activities; (ii) in addition to civil cases followed by summary procedure, civil cases followed by ordinary procedure and civil cases of second instance which meet certain criteria may also be tried by a single judge; (iii) the scope of the litigation documents which are allowed to be served by electronic means expands to include judgments, awards and mediation statements; (iv) the period of service which is effected by public announcement in cases where the location of the recipient of the service is unknown or the service cannot be served by other means specified in the China Civil Procedure Law is shortened from 60 days to 30 days; (v) with respect to small claims procedure, the amount of the subject matter applicable to small claims procedure is raised, the trial time for small claims procedure is limited to three months and certain types of cases, such as cases of personal relation, are excluded from application of small claims procedure; and (vi) the jurisdiction of judicial conformation of a mediation agreement is further clarified and the parties to a mediation agreement are given more options in terms of choosing the people’s court for judicial conformation.
19

Collecting and Using China-Sourced Human Genetic Resources and Derived Data
On March 4, 2022, the Ministry of Science and Technology (MOST) issued Answers to Frequently Asked Questions Regarding Human Genetic Resources (HGRs) Administration, or the Q&A Series I. The Q&A Series I provides short answers to 30 frequently asked questions relating to the collection, preservation, utilization and external provision of China-sourced HGRs. For example, the Q&A Series I clarifies that a notification filing with the Human Genetic Resources Administration Office of China, or HGRAC, is required for purpose of transferring China-sourced HGRs to regulatory authorities in other jurisdictions.
On March 22, 2022, the Ministry of Science and Technology (MOST) issued the Draft Implementing Rules of the Regulation on the Administration of Human Genetic Resources (DraftInternet Advertising
In February 2023, the SAMR issued the Measures for Comment), or the Draft Implementing Rules, which closely scrutinizes all HGRs-related activity from upstream collection of HGR materials to downstream exploitation and external provision of the HGR materials and data derived therefrom (“HGR data”). The Draft Implementing Rules are intended to provide operational details and clarify questions that have emerged in the past few years after the Regulation on the Administration of Internet Advertising, which became effective on May 1, 2023 (the “Internet Advertising Measures”). The Internet Advertising Measures reiterate requirements under the PRC Advertising Law for advance approval from local administrative authorities to advertise pharmaceutical products and impose additional restrictions on the form and content of advertisements for pharmaceutical products.
Measures on Ethics Review for Life Sciences and Medical Research Involving Human Genetic Resources became effective. UnderSubjects
In February 2023, the Draft Implementing Rules, clinical studies conductedNational Health Commission, together with three other government agencies, jointly released the Measures on Ethics Review for purpose of obtaining marketing authorizationLife Sciences and Medical Research Involving Human Subjects (the “Ethics Review Measures”). The Ethics Review Measures set forth criteria and specific steps for drugsethics reviews for life sciences and medical devices inresearch involving human subjects carried out by medical institutions, colleges and universities, or scientific research institutes located within mainland China if not involvingand elaborate the export of HGR materials, will be eligiblecontent requirements for a notification filing (as opposedinformed consent forms. Clinical trials carried out by PRC clinical trial sites and sponsored by us are generally subject to the advance approval) if the HGR materials are collected by sites, and processed by sites or an onshore third-party lab specified in the clinical trial protocol. Ethics Review Measures.
The Draft Implementing Rules provide clearer guidance on how to allocate the intellectual property derived from a Sino-foreign cooperative research utilizing China-Sourced HGRs. The Draft Implementing Rules enumerate situations where a security review is required for external provision or utilization in an open manner of HGR data, such as external provision or utilization in an open manner of HGR data about important genetic pedigrees, HGR data from specific regions, and exome sequencing and genome sequencing information of over 500 individuals.
On April 15, 2022, MOST issued Answers to Frequently Asked Questions Regarding Human Genetic Resources Administration (Q&A Series II), or the Q&A Series II. The Q&A Series II provide formal written reply to 5 frequently asked questions relating to the collection, preservation, utilization and external provision of China-Sourced HGRs. The Q&A Series II specifies that collection, external provision or utilization in an open manner of the data related to clinical practices, patient demographics, lab tests, medical images, etc. that do not carry genetic attributes will not be regulated as collection, external provision or utilization in an open manner of HGR data. The Q&A Series II stipulates that no advance approval for Sino-foreign cooperative research is required for a research utilizing China-Sourced HGRs, if the foreign entity who provides funding support will not substantially participate in the research and have any access to or ownership of the research data and research results.
Auxiliary Rules for the RegulationsProvisions on Supervision and Administration of Medical Devices
Marketing Authorization Holders Concerning the Implementation of Primary Responsibilities for Drug Quality and Safety
On March 18, 2021, the State Council published new RegulationsThe Provisions on Supervision and Administration of Marketing Authorization Holders Concerning the Implementation of Primary Responsibilities for Drug Quality and Safety (the “Provisions”), which were issued by the NMPA in December 2022, became effective on March 1, 2023. The Provisions require marketing authorization holders, including us, to assume primary responsibility for the safety, effectiveness, and quality of drugs during the total product life cycle, and they impose new requirements on drug quality management and drug recall systems, including maintaining a data-based traceability system, among other things.
Regulations for the Administration of the Imported Urgently Needed Drugs and Medical Devices or Order 739,in Bo’ao
In March 2023, the People’s Government of Hainan Province published the Regulations for the Administration of the Imported Urgently Needed Drugs and Medical Devices in the Hainan Bo’ao Lecheng International Medical Tourism Pilot Zone (the “BMTPZ”), which became effective on JuneMay 1, 2021. This
top-level
2023. In accordance with these regulations, medical device administrative regulation contains a numberinstitutions in the BMTPZ meeting certain qualifications may apply to use our products that meet specified requirements, including drugs or medical devices that address specific urgent clinical needs that cannot be met with existing approved products. Such medical institution would bear the primary responsibilities for the safety risks associated with the use of important changes, the practical effects of which will be implemented in corresponding auxiliary regulationssuch urgently needed drugs and rules. Recently, a series of regulations have been amended accordingly to support the implementation of Order 739 in terms of the production, distribution and clinical trials of medical devices.
16


Counter-Espionage Law
Measures forIn April 2023, the Supervision and AdministrationStanding Committee of the Production of Medical Devices
On May 1, 2022,National Peoples Congress voted to adopt a revised versionCounter-Espionage Law, which will become effective on July 1, 2023. The revised Counter-Espionage Law is intended to strengthen provisions on the protection of national security in mainland China. The revised Counter-Espionage Law broadens the definition of espionage, expands protected information, and vests authorities with greater enforcement powers. There is uncertainty with respect to the scope of the Measures for the Supervisionnew provisions and Administration of the Production of Medical Devices,how these provisions will be interpreted or Order 53, promulgatedenforced by the State Administration for Market Regulation, or SAMR, became effective. All medical device manufacturing activities within China should comply with Order 53. Order 53 clarifies the responsibilities and obligations of medical device registrants/ record-filing applicants and their entrusted manufacturers where applicable. Order 53 also establishes a medical device reporting system with an aim to improve administration of medical device production. The reporting system consists of several types of report, including annual self-inspection report, production product variety report, production conditions change report,
re-production
report and recall and disposal report. The medical device registrants/ record-filing applicants and/or the medical device manufacturers need to submit corresponding reports to the local relevant Medical Product Administrations in accordance with Order 53.
Measures for the Supervision and Administration of the Distribution of Medical Devices
regulatory authorities.
On May 1, 2022, a revised version of the Measures for the Supervision and Administration of the Distribution of Medical Devices, or Order 54, promulgated by SAMR came into effect. All medical device distribution activities within China should comply with Order 54. Under Order 54, explicit regulatory requirements were introduced to distributors of medical devices. For example, Order 54 requires medical device distributors to establish quality management system and adopt quality control measures covering the total process of distribution and submit annual self-inspection reports to local relevant Medical Product Administrations.
20

Good Practices for Medical Device Clinical Trials
On May 1, 2022, a revised version of the Good Practices for Medical Device Clinical Trials, or 2022 Medical Device GCP, jointly released by the NMPA and the National Health Commission, came into effect. Going forward, all medical device clinical trials that haven’t passed ethical review by May 1, 2022 should be conducted in compliance with the 2022 Medical Device GCP, if they are conducted for purpose of applying for medical device registration. The 2022 Medical Device GCP specifies responsibilities of each party participating in a medical device clinical trial, in particular the responsibilities of the sponsor. The 2022 Medical Device GCP no longer requires clinical trials of medical devices to be conducted in two or more clinical trial institutions. This will make it easier for medical device companies to conduct medical device registration studies.
Factors Affecting ourOur Results of Operations
Research and Development Expenses
We believe our ability to successfully develop product candidates will be the primary factor affecting our long-term competitiveness, as well as our future growth and development. Developing high quality product candidates requires a significant investment of resources over a prolonged period of time, and a core part of our strategy is to continue making sustained investments in this area.research and development, including internal discovery activities. As a result of this commitment, our pipeline of product candidates has been steadily advancing and expanding, with twelvethirteen late-stage clinical product candidates being investigated as of March 31, 2022.
2023.
We have financed our activities primarily through private placements, our initial public offering on Nasdaq in September 2017 and multiple
follow-on
offerings on Nasdaq and aour secondary listing and initial public offering on the Hong Kong Stock Exchange in September 2020. Through March 31, 2022,2023, we have raised approximately $164.6 million from private equity financing and approximately $2,462.7 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us from our initial public offering,
follow-on
offerings and secondary listing.follow-on offerings. Our operations have consumed substantial amounts of cash since inception. The net cash used in our operating activities was $87.1$69.3 million and $169.5$87.1 million for the three months ended March 31,first quarter of 2023 and 2022, and 2021, respectively. We expect our expenditures to increase significantly in connection with our ongoing activities, particularly as we advance the clinical development of our twelvethirteen late-stage clinical product candidates, research and develop our clinical- and
pre-clinical-stage
product candidates, and initiate additional clinical trials of, and seek regulatory approval for, these and other future product candidates. We review such expenditures for prioritization and efficiency purposes. These expenditures include:
expenses incurred for contract research organizations (CROs)(“CROs”), contract manufacture organizations (CMOs)(“CMOs”), investigators, and clinical trial sites that conduct our clinical studies;
employee compensation related expenses, including salaries, benefits, and equity compensation expenses;
expenses for licensors;
the cost of acquiring, developing, and manufacturing clinical study materials;
facilities and other expenses, which include office leases and other overhead expenses;
costs associated with
pre-clinical
activities and regulatory operations;
and
expenses associated with the construction and maintenance of our manufacturing facilities; and
facilities.
costs associated with operating as a public company.
Selling, General, and Administrative Expenses
Our selling, general, and administrative expenses consist primarily of personnel compensation and related costs, including share-based compensation for commercial and administrative personnel. Other selling, general, and administrative expenses include product distribution and promotion costs, professional service fees for legal, intellectual property, consulting, auditing, and tax services as well as other direct and allocated expenses for rent and maintenance of facilities, insurance, and other supplies used in selling, general, and administrative activities. We anticipate that our selling, general, and administrative expenses will increase in future periods to support increases in our commercial and research and development activities and as we continue to discover, develop, commercialize, develop and manufacture our products and assets. These increases will likely include expanded infrastructure as well as increased headcount, increasedand share-based compensation, charges, increased product distribution, promotion, and promotion costs, expanded infrastructure and increased costs for insurance.insurance costs. We also anticipate to incurincurring additional legal, compliance, accounting, and investor and public relations expenses associated with being a public company.
company listed on both Nasdaq and the Hong Kong Stock Exchange.
21
17

Table of Contents

Our Ability to Commercialize Our Product Candidates
As of March 31, 2022, twelveMay 3, 2023, thirteen of our product candidates are in late-stage clinical development and various others are in clinical and
pre-clinical
development in Greater China and the United States. Our ability to generate revenue from our product candidates is dependent on our receipt of regulatory approvals for and successful commercialization of such products, which may nevernot occur. Certain of our product candidates may require additional
pre-clinical
and/or clinical development, regulatory approvals in multiple jurisdictions, manufacturing supply, substantial investment, and significant marketing efforts before we generate any revenue from product sales.
Our License and Collaboration Arrangements
Our results of operations have been, and we expect them to continue to be, affected by our licensing,license and collaboration and development agreements. We are required to make upfront payments upon our entry into such agreements and milestone payments upon the achievement of certain development, regulatory, and commercialsales-based milestones for the relevant products under these agreements as well as certain royalties at tiered royaltiespercentage rates based on theannual net sales of the licensed products. These upfront payments and milestone payments upon the achievement of certain development and regulatory milestones areWe recorded in research and development expense in our unaudited condensed consolidated financial statementsrelated to upfront license fees and totaleddevelopment milestones of $1.0 million and nil and $171.3 million for the three months ended March 31,first quarter of 2023 and 2022, respectively. We may be obligated to pay up to an additional aggregate amount of approximately $5,299.4 million in development, regulatory, and March 31, 2021, respectively.sales-based milestone payments as well as certain royalties at tiered percentage rates on annual net sales. These milestones may occur before the Company has commercialized or received any revenue from the licensed product or they may not occur at all. If these milestones do occur, we view related payments as positive because they signify that the product is advancing toward potential commercial launch or achieving higher sales levels.
The COVID-19 Pandemic
Our results of operations have been adversely affected by the COVID-19 pandemic, including government actions and quarantine measures taken in response in the first quarter of 2022 or increased infection rates in the first quarter of 2023 after COVID restrictions were lifted or eased, particularly in mainland China where our operations and product markets are primarily located. For example, the pandemic adversely affected our net product revenues in the first quarter of 2023 and 2022 through decreased patient access to our products, such as through reduced hospital access during periods of lockdown or high infection rates, fewer newly diagnosed oncology patients, and delayed or interrupted treatments. The pandemic has also adversely affected our manufacturing and supply chain and our research and development, sales, marketing, and clinical trial activities. The operations of our suppliers, CROs, CMOs, and other contractors and third parties on which we rely also have been adversely affected.
18


Results of Operations
The following table presents our results of operations ($ in thousands):
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Three Months Ended March 31,Change
20232022$%
Revenues:
Product revenue, net62,797 46,095 16,702 36 %
Collaboration revenue— 629 (629)(100)%
Total revenues62,797 46,724 16,073 34 %
Expenses:
Cost of sales(21,337)(15,643)(5,694)36 %
Research and development(48,472)(53,854)5,382 (10)%
Selling, general, and administrative(62,510)(56,991)(5,519)10 %
Loss from operations(69,522)(79,764)10,242 (13)%
Interest income10,232 188 10,044 5343 %
Foreign currency gain8,912 2,285 6,627 290 %
Other income (expenses), net1,234 (4,882)6,116 (125)%
Loss before income tax and share of loss from equity method investment(49,144)(82,173)33,029 (40)%
Income tax expense— — — — %
Share of loss from equity method investment— (221)221 (100)%
Net loss(49,144)(82,394)33,250 (40)%
Net loss attributable to ordinary shareholders(49,144)(82,394)33,250 (40)%
Revenues
Product Revenue
Total revenues consistThe following table presents the components of the following:
Company’s product revenue ($ in thousands):
Three Months Ended March 31,Change
20232022$%
Product revenue - gross$71,212 $53,310 $17,902 34 %
Less: Rebates and sales return(8,415)(7,215)(1,200)17 %
Product revenue - net62,797 46,095 16,702 36 %
   
Three months ended March 31,
 
(in thousands)
  
2022
   
%
   
2021
   
%
 
Revenues:
        
Product revenue, net
  $46,095    98.7   $20,103    100.0 
Collaboration revenue
   629    1.3    —      —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $46,724    100.0   $20,103    100.0 
  
 
 
   
 
 
   
 
 
   
 
 
 
Product Revenue, net
Our product revenue is primarily derived from the sales of ZEJULA, Optune, QINLOCK, and NUZYRA in mainland China and Hong Kong. The amountKong, net of sales returns and rebates to distributors in mainland China with respect to the sales of these products. Our net product revenue increased by $16.7 million in the first quarter of ZEJULA2023, primarily driven by increased sales volumes. Although our sales volumes increased, these volumes were negatively affected by the effects of the COVID-19 pandemic, which decreased patient access to our products, such as through reduced hospital access during periods of lockdown or high infection rates, fewer newly diagnosed oncology patients, and delayed or interrupted treatments. Our product revenue for the three months ended March 31, 2022 and March 31, 2021, respectively, was adjusted by the normal process in mainland Chinafirst quarter of 2023 included a negative $3.9 million adjustment to compensate distributors for products recently soldsales of QINLOCK and NUZYRA at prices prior to the price reductions made in connection with their addition to the NRDL implementation. in the first quarter of 2023. Such sales rebates to distributors on previously purchased products are customary in our industry to compensate those distributors for the new NRDL selling price.
19


The following table disaggregatespresents net revenue by product for the three months ended March 31, 2022 and 2021, respectively:($ in thousands):

Three Months Ended March 31,Change
20232022$%
ZEJULA$42,680 $29,597 $13,083 44 %
Optune13,342 12,797 545 %
QINLOCK1,306 2,959 (1,653)(56)%
NUZYRA5,469 742 4,727 637 %
Total product revenue, net$62,797 $46,095 $16,702 36 %

(in thousands)
  
Three months ended March 31,
 
  
2022
   
%
   
2021
   
%
 
ZEJULA
  $29,597    64.2   $12,606    62.7 
Optune
   12,797    27.8    7,130    35.5 
QINLOCK
   2,959    6.4    367    1.8 
NUZYRA
   742    1.6    —      —   
   
 
 
   
 
 
   
 
 
   
 
 
 
Total product revenue, net
  $46,095    100.0   $20,103    100.0 
   
 
 
   
 
 
   
 
 
   
 
 
 
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Collaboration revenue
Collaboration revenue increased by $0.6 million to $0.6 million for the three months ended March 31, 2022 from nil for the three months ended March 31, 2021 from the collaborative arrangement with Huizheng (Shanghai) Pharmaceutical Technology Co., Ltd.
Cost of Sales
Cost of sales increased by $8.1$5.7 million to $15.6$21.3 million forin the three months ended March 31, 2022 from $7.5 million for the three months ended March 31, 2021first quarter of 2023 primarily due to increasing sales volume, product costsvolumes and higher royalties during the three months ended March 31, 2022.royalties.
Research and Development Expenses
The following table sets forthpresents the components of our research and development expenses for the respective period indicated.
($ in thousands):
(in thousands)
  
Three months ended March 31,
 
2022
   
%
   
2021
   
%
 
Research and development expenses:
        
Three Months Ended March 31,Change
20232022$%
Personnel compensation and related costs
  $24,802    46.1   $12,697    6.2 Personnel compensation and related costs$28,655 $24,802 $3,853 16 %
Licensing fees
   —      —      171,282    84.0 Licensing fees1,000 — 1,000 100 %
CROs/CMOs/Investigators expenses
   23,550    43.7    15,526    7.6 CROs/CMOs/Investigators expenses12,439 23,550 (11,111)(47)%
Other costs
   5,502    10.2    4,347    2.2 Other costs6,378 5,502 876 16 %
  
 
   
 
   
 
   
 
 
Total
  $53,854    100.0   $203,852    100.0 Total$48,472 $53,854 $(5,382)(10)%
  
 
   
 
   
 
   
 
 
Research and development expenses decreased by $150.0$5.4 million to $53.9 million forin the three months ended March 31, 2022 from $203.9 million for the three months ended March 31, 2021 first quarter of 2023 primarily due to:

a decrease of $171.3$11.1 million in licensing fees in connection with the upfront and milestone fee paid for licensing agreementCROs/CMOs/Investigators expenses due to no new licensing for the three months ended March 31, 2022;compensation from collaboration partners related to our clinical trials; partially offset by
an increase of $12.1$3.9 million in personnel compensation and related costs primarily attributable to increased employee compensation costs due to headcount growth during the three months ended March 31, 2022 and the grants of new share options and restricted shares and the continued vesting of option and restricted shares to certain employees,share awards; and
an increase of $8.0$1.0 million in CROs/CMOs/Investigators expenseslicensing fees in the three months ended March 31, 2022 as we advanced our drug candidate pipeline.connection with a milestone payment for a collaboration agreement.
The following table summarizespresents our research and development expenses by program for the three months ended March 31, 2022 and 2021, respectively:
($ in thousands):
Three Months Ended March 31,Change
20232022$%
Clinical programs$12,528 $22,852 $(10,324)(45)%
Pre-clinical programs2,481 2,565 (84)(3)%
Unallocated research and development expenses33,463 28,437 5,026 18 %
Total$48,472 $53,854 $(5,382)(10)%
(in thousands)
  
Three months ended March 31,
 
  
2022
   
%
   
2021
   
%
 
Research and development expenses:
                    
Clinical programs
  $22,852    42.4   $186,256    91.4 
Pre-clinical
programs
   2,565    4.8    2,500    1.2 
Unallocated research and development expenses
   28,437    52.8    15,096    7.4 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $53,854    100.0   $203,852    100.0 
   
 
 
   
 
 
   
 
 
   
 
 
 
23

Research and development expenses attributable to clinical programs decreased by $163.4 million from $186.3$10.3 million during the three months ended March 31, 2021 (which included the licensing feesfirst quarter of $171.3 million)2023 primarily driven by decreased CROs/CMOs/Investigators expenses due to $22.9 million during the three months ended March 31, 2022. Research and development expenses attributablecompensation from collaboration partners related to our clinical trials.
pre-clinical
programs remained relatively consistent during the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Although we manage our external research and development expenses by program, we do not allocate our internal research and development expenses by program because our employees and internal resources may be engaged in projects for multiple programs at any given time.
20


Selling, General, and Administrative Expenses
The following table sets forth the components ofpresents our selling, general and administrative expenses for the respective period indicated.
by program ($ in thousands):
Three Months Ended March 31,Change
20232022$%
Personnel compensation and related costs$40,914 $38,203 $2,711 %
Professional service fees11,983 7,433 4,550 61 %
Other costs9,613 11,355 (1,742)(15)%
Total$62,510 $56,991 $5,519 10 %
(in thousands)
  
Three months ended March 31,
 
  
2022
   
%
   
2021
   
%
 
Selling, General and Administrative Expenses:
                    
Personnel compensation and related costs
  $38,203    67.0   $23,412    65.3 
Professional service fees
   7,433    13.0    3,583    10.0 
Other costs
   11,355    20.0    8,843    24.7 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $56,991    100.0   $35,838    100.0 
   
 
 
   
 
 
   
 
 
   
 
 
 
Selling, general and administrative expenses increased by $21.2$5.5 million to $57.0 million forin the three months ended March 31, 2022 from $35.8 million for the three months ended March 31, 2021first quarter of 2023, primarily due to:
an increase of $14.8 million in personnel compensation and related costs which was primarily attributable to increased commercial and administrative personnel costs due to headcount growth during the three months ended March 31, 2022 and the grants and vesting of share options and restricted shares to certain employees;
an increase of $3.9$4.6 million in professional service fees mainly attributable to our increased legal, compliance, accounting, and investor and public relations expenses associated with being a public company and in connection with sales of ZEJULA, Optune, QINLOCK, and NUZYRA in mainland China and Hong Kong after our commercial launch of these four commercialized products;Kong; and
an increase of $2.5$2.7 million in personnel compensation and related costs which was primarily driven by headcount growth, particularly in commercial and administrative personnel, and grants of share options and restricted shares and the continued vesting of option and restricted share awards; partially offset by
a decrease of $1.7 million in other costs mainly includingrelated to selling, rental, and administrative expenses primarily attributable to thefor commercial operationoperations in mainland China, Hong Kong, and Taiwan.
Interest Income
Interest income were $0.2 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively.
Other Expenses, Net
Other expenses decreasedincreased by $3.6$10.0 million to $2.6$10.2 million forin the three months ended March 31, 2022 from $6.2first quarter of 2023, due to increased interest rates.
Foreign Currency Gain
Foreign currency gain increased by $6.6 million forto $8.9 million in the three months ended March 31, 2021,first quarter of 2023 primarily as a resultdriven by increased remeasurement gain due to depreciation of an increasethe U.S. dollar against the Renminbi (“RMB”).
Other Income (Expenses), Net
Other income, net was $1.2 million in foreign exchange gain and governmental subsidiesthe first quarter of 2023, compared to other expense, net of $4.9 million in the first quarter of 2022, primarily due to the shift from $6.9 million in loss to $0.4 million in gain on equity investment lossinvestments with readily determinable fair value.
Income Tax Expense
There was no change in MacroGenics.
24
our income tax expense, which was zero in both the first quarter of 2023 and 2022.

Critical Accounting Policies and Significant Judgments and Estimates
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates, and assumptions. We periodically evaluate these judgments, estimates, and assumptions based on the most recently available information, our own historical experiences, and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates.
The selection of critical accounting policies, the judgments, and other uncertainties affecting application of those policies, and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
21


Revenue recognitionRecognition
Description
In mainland China, we sell our products to distributors, who ultimately sell the products to healthcare providers. Based on the nature of the arrangements, the performance obligations are satisfied upon the product’s delivery to distributors.
Judgments and Uncertainties
Rebates are offered to distributors, consistent with pharmaceutical industry practices. The estimated amount of unpaid or unbilled rebates, if any, is recorded as a reduction of revenue. EstimatedWe estimate rebates are determined based on contracted rates, sales volumes, and level of distributor inventories. We regularly review the information related to these estimates and adjust the amount accordingly.
Sensitivity of Estimate to Change
Actual amounts of rebates ultimately paid or billed may differ from our estimates. We will reassessregularly review the factors and judgments underlying these estimates forand adjust the amounts of rebates periodically.accordingly. If actual results in the future vary from our estimates, we willalso adjust these estimates accordingly, which would affect net product revenue and earnings in the period such variances become expected or known.
Research and Development Expenses
Description
Research and development expenses are charged to expense as incurred when these expenditures relate to our research and development services and have no alternative future uses.
PreclinicalPre-clinical and clinical trial costs are a significant component of our research and development expenses. We have a history of contracting with third parties that perform various preclinicalpre-clinical and clinical trial activities on our behalf of us in the ongoing development of our product candidates. Expenses related to preclinicalpre-clinical and clinical trials are accrued based on our estimates of the actual services performed by the third parties for the respective period.
Judgments and Uncertainties
The process of estimating our research and development expenses involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a
pre-determined
schedule, or when contractual milestones are met; however, some require advanced payments. We make estimates of our research and development expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time.
Sensitivity of Estimate to Change
Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting expenses that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of research and development expenses.
25

Share-Based Compensation
Description
Employees’ share-basedShare-based awards for our employees are measured at the grant date fair value of the awards and recognized as expenses (1) immediately at grant date if no vesting conditions are required; or (2) using graded vestinga straight-line method over the requisite service period, which is the vesting period.
To the extent the required vesting conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expensesexpense relating to those awards are reversed.
22


Judgments and Uncertainties
We determine the fair value of the stock options granted to employees using the Black-Scholes option valuation model. Using this model, fair value is calculated based on assumptions with respect to (i) the expected volatility of our ADS price, (ii) the periods of time over which grantees are expected to hold their options prior to exercise (expected lives), (iii) the expected dividend yield on our ADS,ADSs, and (iv) risk-free interest rates, which are based on quoted U.S. Treasury rates for securities with maturities approximating the options’ expected lives.lives of the options. Expected volatility has been estimated based on actual movements in some comparable companies’ stock pricesprice over the most recent historical periods equivalent to the options’ expected lives. Expected livesThe expected term of the share options represents the average period the share options are principally based on ourexpected to remain outstanding. As the Company does not have sufficient historical information since its IPO to develop reasonable expectations about future exercise experience with previous option grants.patterns and post-vesting employment termination behavior, the expected term of options granted is derived from the average midpoint between the weighted average vesting and the contractual term, also known as the simplified method. The expected dividend yield is zero as we have never paid dividends and do not currently anticipate paying any in the foreseeable future.
Sensitivity of Estimate to Change
The assumptions used in this method to determine the fair value of ordinaryour option shares consider historical trends, macroeconomic conditions, and projections consistent with the Company’s operating strategy. Changes in these estimates can have a significant impact on the determination of fair value of the stock options.option shares. If factors change or different assumptions are used, theour share-based compensation expenses could be materially different for any period.
Income Taxes
Description
In accordance with the provisions of ASC 740, Income Taxes, we recognize in our financial statements the benefit of a tax position if the tax position is “more likely than not” to prevail based on the facts and technical merits of the position. Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement. We estimate our liability for unrecognized tax benefits which are periodically assessed and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. The ultimate outcome for a particular tax position may not be determined with certainty prior to the conclusion of a tax audit and, in some cases, appeal or litigation process.
Judgments and Uncertainties
We consider positive and negative evidence when determining whether some portion or all of our deferred tax assets will not be realized. This assessment considers, among other matters, the nature, frequency, and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, our historical results of operations, and our tax planning strategies. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the level of our historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will not realize the deferred tax assets resulted from the tax loss carried forward in the future periods.
Sensitivity of Estimate to Change
The actual benefits ultimately realized may differ from our estimates. As each audit is concluded, adjustments, if any, are recorded in our financial statements in the period in which the audit is concluded. Additionally, in future periods, changes in facts and circumstances and new information may require us to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur. As of March 31, 20222023 and 2021,2022, we did not have any significant unrecognized uncertain tax positions.
B. Liquidity and Capital Resources
WeTo date, we have financed our activities primarily through private placements, our September 2017 initial public offering and various follow-on offerings on the Nasdaq, stock exchange, various
follow-on
offerings and our September 2020 secondary listing and initial public offering on the Hong Kong Stock Exchange of our ordinary shares and/or ADSs.Exchange. Through March 31, 2022,2023, we have raised approximately $164.6 million fromin private
23


equity financing and approximately $2,462.7 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us fromin our initial public offering secondary listing and subsequent
follow-on
offerings.
26

offerings on Nasdaq and our initial public offering on the Hong Kong Stock Exchange. Our operations have consumed substantial amounts of cash since inception. The net cash used in our operating activities was $87.1$69.3 million and $169.5$87.1 million for the three months endedfirst quarter of 2023 and 2022, respectively. As of March 31, 2022 and 2021, respectively. We2023, we have commitments for capital expenditureexpenditures of $22.3$6.0 million, as of March 31, 2022, mainly for the purpose of plant construction and installation. We currently are not awareFor information on our research and development activities and expenditures see the Research and Development Expenses, License and Collaboration Arrangements, and Results of any events that are reasonably likely to cause a material changeOperations sections in the relationship between costs and revenues.MD&A above.
As of March 31, 2022,2023, we had cash and cash equivalents, restricted cash, and short-term investmentinvestments of $1,313.0$931.4 million. Our expenditures are principally focused on research and development and are largely discretionary. As such, we believe that our current losses and cash used in operations do not present going concern issues. Based on our current operating plan, we expect that our cash, cash equivalents, restricted cash, and short-term investments as of May 9, 2023, will enable us to fund our operating expenses and capital expendituresexpenditure requirements for at least the next 12 months. However, in order to bring to fruition our research and development objectives, we willmay ultimately need additional funding sources, and there can be no assurances that theysuch funding will be made available.available to us on acceptable terms or at all.
The following table providespresents information regarding our cash flows for the three months ended March 31, 2022 and 2021:
($ in thousands):
   
Three months ended
March 31,
 
(in thousands)
  
2022
   
2021
 
Net cash used in operating activities
  $(87,127  $(169,500
Net cash (used in) provided by investing activities
   (30,144   742,005 
Net cash provided by (used in) financing activities
   258    (271
Effect of foreign exchange rate changes
   (130   (930
  
 
 
   
 
 
 
Net (decreases) increases in cash, cash equivalents and restricted cash
  $(117,143  $571,304 
  
 
 
   
 
 
 
Three Months Ended March 31,Change
20232022$
Net cash used in operating activities$(69,287)$(87,127)$17,840 
Net cash used in investing activities(53,954)(30,144)(23,810)
Net cash (used in) provided by financing activities(3,886)258 (4,144)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash(1,299)(130)(1,169)
Net decrease in cash, cash equivalents and restricted cash$(128,426)$(117,143)$(11,283)
Net Cash Used in Operating Activities
Net cash used in operating activities
During decreased by $17.8 million to $69.3 million in the three months ended March 31, 2022, our operating activities used $87.1first quarter of 2023, primarily due to a decrease of $33.3 million of cash, which resulted principally from ourin net loss partially offset by a decrease of $82.4$8.5 million adjusted for
non-cash
charges of $23.0 million, and cash used in our operating assets and liabilities of $27.7 million.
During the three months ended March 31, 2021, our operating activities used $169.5 million of cash, which resulted principally from ouradjustments to reconcile net loss of $232.9 million, adjusted
for non-cash charges
of $72.1 million, and cash used in our operating assets and liabilities of $8.7 million. The decrease into net cash used in operating activities was primarily due to theand a decrease of license payments.$7.0 million in net changes in operating assets and liabilities.
Net cash (used in) provided by investing activitiesCash Used in Investing Activities
Net cash used in investing activities was $30.1increased by $23.8 million to $54.0 million for the three months ended March 31, 2022first quarter of 2023. The increase was primarily due to a decrease of $50.6 million in proceeds from the maturity of short-term investments, partially offset by a decrease of $20.3 million in purchases of short-term investments and a decrease of $6.2 million in purchases of property and equipment.
Net Cash (Used in) Provided by Financing Activities
Net cash used in financing activities was $3.9 million for the first quarter of 2023 compared to net cash provided by investing activities of $742.0 million for the three months ended March 31, 2021. The decrease in cash provided by investing activities was primarily due to the decrease of proceeds from maturity of short-term investments during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
Net cash provided by (used in) financing activities
Net cash provided by financing activities was $0.3 million for the three months ended March 31, 2022 compared to net cash used in financing activities of $0.3 million for the three months ended March 31, 2021. The increase in cash provided by financing activitiesfirst quarter of 2022. This change was primarily due to the reduced paymentan increase of public offering costs during the three months ended March 31, 2022.
C. Research and Development Activities and Expenditures, Including Patents and Licenses
Full details$5.0 million in employee taxes paid related to net share settlement of our research and development activities and expenditures are providedequity awards partially offset by an increase of $0.9 million in the “Research and Development Expenses” and “Resultsproceeds from exercises of Operations” sections above.
27
stock options.

D. Trend Information
Other than as described elsewhere in this Quarterly Report on Form
10-Q,
we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material adverse effect on our revenue, income from continuing operations, profitability, liquidity or capital resources, or that would cause our reported financial information not necessarily to be indicative of future operation results or financial condition.
Recently Issued Accounting Standards
For more information regarding recently issued accounting standards, please see “ItemPart II – Item 8. Financial Statements and Supplementary Data-Recent accounting pronouncements”Data – Recent Accounting Pronouncements in our 20212022 Annual Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk including foreign exchange risk, credit risk, cash flow interest rate risk and liquidityinflation risk.
24


Foreign Exchange Risk
Renminbi, or RMB, is not a freely convertible currency. The State Administration of Foreign Exchange, under the authority of the People’s Bank of China (PBOC)(“PBOC”), controls the conversion of RMB into foreign currencies. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. The cash and cash equivalents of the Company included aggregated amounts of RMB 371.8RMB263.0 million and RMB 151.7RMB316.8 million, which were denominated in RMB, representing 7%4% and 2%5% of the cash and cash equivalents as of March 31, 20222023 and December 31, 2021,2022, respectively.
Our business mainly operates in mainland China with a significant portion of our transactions settled in RMB, and our financial statements are presented in U.S. dollars. We do not believe that we currently have significant direct foreign exchange risk and have not used derivative financial instruments to hedge our exposure to such risk. Although, in general, our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs and ordinary shares will be affected by the exchange rate between the U.S. dollar and the RMB and between the HK dollar and the RMB, respectively, because the value of our business is effectively denominated in RMB, while ADSs will beand ordinary shares are traded in U.S. dollars.
dollars and HK dollars, respectively.
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in Greater China’s political and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the PBOC. On July 21, 2005, the Chinese government changed its
decade-old
policy of pegging the value of the RMB to the U.S. dollar. Under the revised policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy resulted in a more than 20% appreciation of the RMB against the U.S. dollar in the following three years. Between July 2008 and June 2010, this appreciation halted, and the exchange rate between the RMB and U.S. dollar remained within a narrow band. In June 2010, the PBOC announced that the Chinese government would increase the flexibility of the exchange rate, and thereafter allowed the RMB to appreciate slowly against the U.S. dollar within the narrow band fixed by the PBOC. However, in August 2015, the PBOC significantly devalued the RMB.
The value of our ADSs and our ordinary shares will be affected by the foreign exchange rates between U.S. dollars, HK dollars, and the RMB. For example, to the extent that we need to convert U.S. dollars or HK dollars into RMB for our operations or if any of our arrangements with other parties are denominated in U.S. dollars or HK dollars and need to be converted into RMB, appreciation of the RMB against the U.S. dollar or the HK dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert RMB into U.S. dollars or HK dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar or the HK dollar against the RMB would have a negative effect on the conversion amounts available to us.
Since 1983, the Hong Kong Monetary Authority (HKMA)(“HKMA”) has pegged the HK dollar to the U.S. dollar at the rate of approximately HK$7.80 to US$1.00. However, there is no assurance that the HK dollar will continue to be pegged to the U.S. dollar or that the HK dollar conversion rate will remain at HK$7.80 to US$1.00. If the HK dollar conversion rate against the U.S. dollar changes and the value of the HK dollar depreciates against the U.S. dollar, our assets denominated in HK dollars will be adversely affected. Additionally, if the HKMA were to repeg the HK dollar to, for example, the RMB rather than the U.S. dollar, or otherwise restrict the conversion of HK dollars into other currencies, then our assets denominated in HK dollars will be adversely affected.
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Credit Risk
Financial instruments that are potentially subject to significant concentration of credit risk consist of cash and cash equivalents, short-term investments, accounts receivable, and notes receivable.
The carrying amounts of cash and cash equivalents and short-term investments represent the maximum amount of loss due to credit risk. WeAs of March 31, 2023 and December 31, 2022, we had cash and cash equivalents of $847.0$879.8 million and $964.1$1,008.5 million and short-term investments of $465.3$50.6 million and $445.0 million, as of March 31, 2022 and December 31, 2021,nil, respectively. As of March 31, 20222023 and December 31, 2021,2022, all of our cash and cash equivalents and short-term investments were held by major financial institutions located in mainland China and international financial institutions outside of mainland China which we believe are of high credit quality and for which we continually monitor thecontinued credit worthiness of these financial institutions.worthiness.
Accounts receivable are typically unsecured and are derived from product sales and collaborative arrangement.arrangements. We manage credit risk ofrelated to our accounts receivable through ongoing monitoring of the outstanding balances and limitlimiting the amount of credit extended based upon payment history and the debtor’s current credit worthiness. Historically, we have collected the receivables
25


from customers within the credit terms with no significant credit losses incurred. As of March 31, 2022,2023, our two largest debtorscustomers accounted for approximately 39%29% of our total accounts receivable collectively.
CertainDuring the first quarter of 2023, certain accounts receivable balances arewere settled in the form of notes receivable. As of March 31, 2022,2023, such notes receivable included bank acceptance promissory notes that are
non-interest
bearing and due within six months. These notes receivable were used to collect the receivables based on an administrative convenience, given these notes are readily convertible to known amounts of cash. In accordance with the sales agreements, whether to use cash or bank acceptance promissory notes to settle the receivables is at our discretion, and this selection does not impact the agreed contractual purchase prices.
Inflation Risk
In recent years, mainland China has not experienced significant inflation. Although the global economy, including the U.S. economy, has experienced rising inflation in recent quarters, which can increase the costs of our products and thusproduct candidates purchased from third parties and, as a result, adversely affect our results of operations, inflation has not had a material impact on our results of operations. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation in mainland China.
China or in other countries in which our third-party partners operate.
Item 4. Controls and Procedures
Management’s Evaluation of our Disclosure Controls and Procedures
We maintainOur management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures that(as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that the information required to be disclosed in the reports that we file or submitfurnish under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2)that such information is accumulated and communicated to our management, including our principal executive officerChief Executive Officer and principal financial officer,Chief Financial Officer, to allow timely decisions regarding required disclosure.
As of March 31, 2022, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e)
and
15d-15(e)
under the Exchange Act). Our management recognizes that any Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, andthe desired control objective. Based upon that evaluation, our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive officer and principal financial officer havehas concluded based upon the evaluation described above that, as of March 31, 2022,2023, our disclosure controls and procedures were effective at a reasonable assurance level.effective.
Changes in Internal Control over Financial Reporting
During the three months ended March 31, 2022, there have not been anyThere were no changes in our internal controlscontrol over financial reporting (as such item is defined in Rules
13a-15(f)
and
15d-15(f)
promulgated under) during the Exchange Act)fiscal quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal controlscontrol over financial reporting.
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26

PART
II-OTHER
INFORMATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We may be, from time to time, subject to claims and suits arising in the ordinary course of business. Although the outcome of these and other claims cannot be predicted with certainty, management does not believe that the ultimate resolution of these matters will have a material adverse effect on our financial position or on our results of operations. We are not currently a party to nor is our property the subject of, any actual or threatened material legal or administrative proceedings.
Item 1A. Risk Factors.
This Quarterly Report on Form
10-Q
report should be read in conjunction with our 20212022 Annual Report, which describes various material risks and uncertainties to which we are or may become subject. These risks and uncertainties could, directly or indirectly, adversely affect our business, results of operations, financial condition, liquidity, or cash flows, and could cause our actual results to differ materially from our past results or the results contemplated by any forward-looking statements we make. We believe the risks described in this section of our Quarterly Report on Form
10-Q
and our 2021 Annual Report are the most significant we face; however, these are not the only risks we face. We face additional risks and uncertainties not currently known to us or that we currently believe are not material.
Material changes from the risk factors set forth in our 2021 Annual Report are set forth below:
Because the majority of our operations are in mainland China and our auditor has been located in mainland China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of Chinese authorities, there have been concerns regarding oversight of the audits of our financial statements filed with the SEC. In March 2022, SEC staff conclusively identified us under the HFCAA as an issuer that uses an auditor that the PCAOB is unable to inspect or investigate completely. Although in April 2022 our Audit Committee approved the engagement of KPMG, a U.S. auditor that is subject to inspection by the PCAOB, as our independent public accounting firm for the fiscal year ending December 31, 2022, KPMG is in the process of concluding its standard client evaluation procedures, including obtaining approval from the Hong Kong Stock Exchange to audit the Company’s consolidated financial statements submitted to the Hong Kong Stock Exchange. If for any reason we continue to fail to meet the audit requirements of the HFCAA for three consecutive years, the HFCAA requires the SEC to prohibit the trading of our securities on a national securities exchange, including Nasdaq, or on
over-the-counter
markets in the United States. In addition, the U.S. Senate and U.S. House of Representatives have each passed bills, which, if enacted, would decrease the number of
non-inspection
years from three consecutive years to two, thus reducing the time period before our securities may be prohibited from trading on a U.S. securities exchange or delisted from Nasdaq. The foregoing could adversely affect the market price of our ordinary sharesstrategies, and/or ADSs and our ability to raise capital effectively.
Auditors of companies that are registered with the SEC and traded publicly in the United States, including our independent registered public accounting firm, are required to be registered with the PCAOB and to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and applicable professional standards. Because our current auditor is located in mainland China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of Chinese authorities, our auditor is not currently inspected by the PCAOB.
PCAOB inspections of auditors located outside of mainland China and Hong Kong have at times identified deficiencies in those auditors’ audit procedures and quality control procedures, which may be addressed as part of the PCAOB’s inspection process to improve future audit quality. The lack of PCAOB inspections of audit work undertaken in mainland China and Hong Kong prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors are deprived of the benefits of PCAOB inspections, which could result in limitations or restrictions on our access to the U.S. capital markets.
Furthermore, in recent years, the U.S. Congress and regulatory authorities have continued to express concerns about challenges in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. As part of this continued focus on access to audit and other information currently protected by national law, in particular under Chinese law, the United States enacted the HFCAA in December 2020. The HFCAA requires the SEC to identify issuers that have filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a restriction imposed by a
non-U.S.
authority in the auditor’s local jurisdiction (a “Commission-Identified Issuer”). Under the HFCAA, if the SEC conclusively identifies an issuer as a Commission-Identified Issuer for three consecutive years, the SEC is required to prohibit the trading of the issuer’s securities on a national securities exchange or through any other method that is within the jurisdiction of the SEC to regulate, including
over-the-counter
markets in the United States. Our securities may be prohibited from trading on the Nasdaq or other U.S. stock exchanges if our auditor is not inspected by the PCAOB for three consecutive years, and this ultimately could result in our ADSs being delisted.
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Furthermore, in June 2021, the U.S. Senate passed the AHFCAA, which, if enacted, would amend the HFCAA and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years (as opposed to the three years under the HFCAA). In February 2022, the U.S. House of Representatives passed the America COMPETES Act, which similarly would amend the HFCAA to shorten the number of
non-inspection
years from three years to two years. The America COMPETES Act, however, includes a broader range of legislation than the AHFCA Act in response to the U.S. Innovation and Competition Act passed by the U.S. Senate in 2021. The U.S. House of Representatives and the U.S. Senate will need to agree on amendments to these respective bills to allow the legislature to pass their amended bills before the President can sign the bill into law. It is unclear if or when either of these bills will be signed into law.
In September 2021, the PCAOB adopted PCAOB Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act, which provides a framework for the PCAOB to use when determining whether the PCAOB is unable to inspect or investigate completely a registered public accounting firm located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction for the purposes of the HFCAA. PCAOB Rule 6100 establishes the manner of the PCAOB’s determinations; the factors the PCAOB will evaluate and the documents and information it will consider when assessing whether a determination is warranted; the form, public availability, effective date, and duration of such determinations; and the process by which the PCAOB will reaffirm, modify or vacate any such determinations. In November 2021, the SEC announced that it had approved Rule 6100.
In December 2021, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCAA for Commission-Identified Issuers, which became effective on January 10, 2022. In addition, the PCAOB issued a Determination Report, pursuant to PCAOB Rule 6100, which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong because of positions taken by Chinese authorities in those jurisdictions. The SEC began to identify Commission-Identified Issuers for fiscal years beginning after December 18, 2020. A Commission-Identified Issuer will be required to comply with the submission and disclosure requirements in the annual report for each year in which it was so identified. If an issuer is identified as a Commission-Identified Issuer based on its annual report for the fiscal year ended December 31, 2021, the issuer will be required to comply with the submission or disclosure requirements in its annual report for the fiscal year ended December 31, 2022.
In March 2022, SEC staff conclusively identified the Company as a Commission-Identified Issuer. In April 2022 the Audit Committee of our Board of Directors approved the engagement of KPMG, an auditor located in the United States that is inspected by the PCAOB, as our independent registered public accounting firm for the fiscal year ending December 31, 2022 for the annual consolidated financial statements of the Company filed with the SEC and the Company’s internal controls over financial reporting in accordance with the Exchange Act. KPMG will also be engaged to audit the consolidated financial statements of the Company for the year ending December 31, 2022 submitted to the Hong Kong Stock Exchange in accordance with the Rules Governing the Listing of Securities of the Hong Kong Stock Exchange, subject to the Company’s receipt of the approval from the Hong Kong Stock Exchange and the FRC. Even though such approval is expected to be administrative in nature, if such approval is rejected by the Hong Kong Stock Exchange or the FRC, or, for some reason, we are not able to enter into an engagement agreement with KPMG, the Company would need to engage another auditor that is inspected by the PCAOB in order to comply with the audit requirements of the HFCAA. Additionally, even if KPMG is approved as our auditor by the Hong Kong Stock Exchange and the FRC, there remains a risk that the CSRC or another Chinese governmental agency could limit or prohibit our ability to use KPMG as our auditor. The foregoing could adversely affect the market price of our ordinary shares and/or ADSs and our ability to raise capital effectively.
While we understand that there appears to be ongoing, constructive dialogue among the CSRC, the SEC and the PCAOB regarding permitting the inspection of PCAOB-registered accounting firms in China, there can be no assurance that the U.S. and Chinese governments ultimately reach an agreement on these matters, or that we will be able to comply with requirements imposed by U.S. regulators, Nasdaq, the CSRC, or other Chinese regulators. If for any reason we continue to be identified as a Commission-Identified Issuer that uses an auditor not subject to PCAOB inspection for three consecutive years or, if the AHFCAA or the America COMPETES Act is passed, two consecutive years, our ADSs may be delisted from Nasdaq as a result. Delisting of our ADSs would force holders of our ADSs to sell their ADSs or convert them into our ordinary shares. Further, we may be prohibited from listing our ADSs on another U.S. securities exchange. The market price of our ordinary shares and/or ADSs could be adversely affected as a result of anticipated negative impacts of such legislative or executive actions upon, as well as negative investor sentiment toward, companies with significant operations in mainland China and Hong Kong that are listed in the United States, regardless of whether such actions are implemented and regardless of our actual operating performance.
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We may be subject to additional approval, filing, and compliance obligations with Chinese authorities in connection with our engagement of KPMG LLP, a U.S. auditor that is subject to PCAOB inspection.
Pursuant to the Draft Archives Rules, released by the CSRC for public comment on April 2, 2022, where Chinese domestic companies (including Chinese domestic companies that are listed outside of China through a overseas holding entity, such as Zai Lab Limited) seek to disclose or provide, or disclose or provide through its overseas holding entity, documents and materials that have a sensitive impact (i.e. be detrimental to national security or the public interest if divulged) or contain state secrets or government department work secrets to relevant entities or individuals including securities companies, other securities service providers and overseas regulators in connection with a securities offering outside of China, such company will be required to complete the relevant approval, filing, and other regulatory procedures. Disclosure of such materials to auditors based outside of China is explicitly included within the scope of the Draft Archives Rules and any such auditors are required under Chinese law to abide by the corresponding approval, filing, and compliance procedures in accordance with relevant Chinese regulations. The Draft Archive Rules are still in draft form and we do not yet know the scope of materials that have a sensitive impact or contain state secrets or government department work secrets, but if the Draft Archives Rules become effective and our auditor’s work papers are determined to be materials that have a sensitive impact or contain state secrets or government department work secrets, our engagement of KPMG LLP may subject us and KPMG LLP to additional approval, filing, and compliance obligations in China under the Draft Archive Rules.
We face risks related to public health crises, including the current
ongoing COVID-19
pandemic, which could have a material adverse effect on our business and results of operations.
Our global operations expose us to risks associated with public health crises, such as epidemics and pandemics, natural catastrophes, such as earthquakes, hurricanes, typhoons, or floods, or other disasters such as fires, explosions and terrorist activity or war that are outside of our control, including government reactions due to such events. Our business operations and those of our suppliers, CROs, CMOs and other contractors may potentially suffer interruptions caused by any of these events.
In December 2019, a respiratory illness caused by a novel strain of coronavirus, SARS-CoV2, causing the Coronavirus Disease 2019, also known
as COVID-19
or coronavirus emerged. Global health concerns relating to
the COVID-19
pandemic have been weighing on the macroeconomic environment and the pandemic has significantly increased economic volatility and uncertainty. The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines,
shelter-in-place or stay-at-home
orders and business shutdowns.
Although the
COVID-19
outbreak appeared to have been largely under control within Greater China since the second fiscal quarter of 2020, there have been continuous rebound cases in Greater China, especially in some large cities like Shanghai, Shenzhen and Hong Kong since February 2022 and uncertainties associated with the future developments of the pandemic still exist, which resulted in unpredictable regional quarantines, travel restrictions and shutdown of businesses, which has caused slower recovery of the Chinese economy. In January and February 2022, Shanghai, where our principal executive offices are located, experienced a wave of intermittent government shutdowns in connection with
COVID-19
control measures. From late March 2022,
COVID-19
lockdown restrictions were increased and most of the city is subject to a full lockdown. Other cities or regions in China are or may be subject to similar government restrictions. The effect of these restrictive quarantine measures imposed by the Chinese government, which may continue for some indeterminate amount of time, may have a material adverse effect on our business for the remainder of this fiscal year.
The
continued COVID-19
pandemic and related government restrictions could adversely impact our operations and, given the impact it may have on the manufacturing and supply chain, sales and marketing and clinical trial operations of us and our business partners and the ability to advance our research and development activities and pursue development of any of our pipeline products, each of which could have an adverse impact on our business and our financial results.
For example, due to business interruptions to hospitals and treatment centers in mainland China arising in connection with the outbreak
of COVID-19,
some patients have experienced difficulties in accessing hospital care and, as a result, they could have limited or even no access to ZEJULA, Optune, QINLOCK, or NUZYRA. The ability to conduct
in-person
interactions between medical representatives and physicians has also been adversely affected. In addition, we have experienced delays in the enrollment of patients in our clinical trials due to the outbreak
of COVID-19.
Our commercial partners and licensors also have similarly experienced delays in enrollment of patients to their clinical trials due to the outbreak
of COVID-19
in their respective territories. Although so far none of our NDA submissions and acceptances, key clinical development milestones or CTA approvals have been materially delayed, there is no guarantee this will continue to be the case.
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Additionally, the
COVID-19
government restrictions and shutdown orders—those currently in effect and which may be effective in the future—could cause us or our commercial partners, licensors, and CMOs to experience delays or interruptions in the ability to manufacture and supply the products we are selling commercially in Greater China. For example, if current COVID-related restrictions in Shanghai continue, such restrictions may impact the distribution and sale of our products within China. These and other government restrictions could limit our and our distributors’ ability to successfully sell our commercial products in Greater China, even if we implement contingent plans. Any or all of these adverse effects arising from
COVID-19
may adversely affect our operations this year and cause the value of the Company to decline, potentially limiting our ability to obtain additional financing on terms acceptable to the Company.
We have taken precautionary measures intended to help minimize the risk of the virus to our employees, including limiting
non-essential
travel, preparing pandemic prevention materials in the office, permitting work from home as appropriate, and providing
COVID-19
testing for our employees. Certain of these measures could negatively affect our business. For instance, if our employees are required to continue to work remotely as a result of local government mandates, company policy updates, or otherwise, absenteeism or employee turnover could increase, or we may experience disruptions to our operations or increased risk of a cybersecurity incident.
There are no comparable recent events that provide guidance as to the effect
the COVID-19
outbreak as a global pandemic may have and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change, and the actual effects will depend on many factors beyond our control.
Our business and financial results, including our ability to raise capital or raise capital on favorable terms and the market price of our ordinary shares and/or our ADSs, may be adversely affected by the geopolitical factors arising in connection with Russia’s invasion of Ukraine, including particularly how countries like the United States and China choose to respond to this war. As a result, the value of our ordinary shares and ADSs may significantly decline.
Although we do not conduct business in Russia or Ukraine, our business and financial results, including our ability to raise capital or raise capital on favorable terms and the market price of our ordinary shares and/or our ADSs, may be adversely affected by geopolitical factors arising in connection with Russia’s invasion of Ukraine. For example, in connection with this war, the United States and other nations have raised the possibility of secondary sanctions on China, Chinese banks and Chinese businesses that do business with Russia or its allies, including Belarus. We do not conduct business in Russia or Belarus, or with Russian or Belarusian counterparties, but we may be impacted by sanctions if third parties with which we do business, such as customers, suppliers, intermediaries, services providers or banks, are subject to such sanctions or if broader sanctions are imposed. Our business and operations may also be adversely impacted by any actions taken by China in response to the war or any related sanctions or threatened sanctions. If sanctions are imposed or if this war continues or expands, or leads to continued political or economic instability, terrorist activity, or further government actions or increased economic or political tensions between the United States and China, our business and financial results, including our ability to raise capital or raise capital on favorable terms and the market price of our ordinary shares and/or our ADSs, may be adversely impacted and the value of our ADSs and ordinary shares may significantly decline.
We may not be able to access the capital and credit markets on terms that are favorable to us.
We may seek access to the capital and credit markets to supplement our existing funds and cash generated from operations for working capital, capital expenditure and debt service requirements and other business initiatives. The capital and credit markets are experiencing, and have in the past experienced, extreme volatility and disruption, which leads to uncertainty and liquidity issues for both borrowers and investors. That volatility and unpredictability in the financial markets is adversely affecting the access to capital and credit for many life sciences companies, but that risk is currently exacerbated for companies like ours with significant operations in China by factors such as the geopolitical tensions between the U.S. and China, the ongoing war between Russia and Ukraine, and the uncertainty about the duration, scope, and effect of the COVID-19 restrictions imposed by the Chinese government. In the event that these continued adverse market conditions may affect us, we may be unable to obtain adequate capital or credit market financing, obtain that capital or credit on favorable terms, or access such capital or credit in the market(s) or manner most favorable to the Company.
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Other Risk Factors
The following is a summary of significant risk factors and uncertainties that may affect our business which are discussed in more detail above and in our 2021 Annual Report:
The uncertainties in the Chinese legal system could materially and adversely affect us;
Changes in United States and China relations, as well as relations with other countries, and/or regulations may adversely impact our business, our operating results, our ability to raise capital and the market price of our ordinary shares and/or our ADSs;
The Chinese government may intervene in or influence our operations at any time, which could result in a material change in our operations and significantly and adversely impact the value of our ADSs and ordinary shares, including potentially making those ADSs or ordinary shares worthless;
The audit report included in our 2021 Annual Report was prepared by an auditor who is not inspected by the PCAOB and, as such, you are deprived of the benefits of such inspection, we may be subject to additional Nasdaq listing criteria or other penalties and our ADSs may be delisted from the U.S. stock market;
Proceedings brought by the SEC against China-based accounting firms could result in our inability to file future financial statements in compliance with the requirements of the Exchange Act;
Compliance with China’s Data Security Law, Cyber Security Law, Cybersecurity Review Measures, Personal Information Protection Law, the Regulation on the Administration of Human Genetic Resources, the Biosecurity Law, and any other future laws and regulations may entail significant expenses and could materially affect our business. Our failure to comply with such laws and regulations could lead to government enforcement actions and significant penalties against us, materially and adversely impacting our operating results;
The economic, political and social conditions in mainland China, as well as governmental policies, could affect the business environment and financial markets in mainland China, our ability to operate our business, our liquidity and our access to capital;
If the Chinese government determines that our corporate structure does not comply with Chinese regulations, or if Chinese regulations change or are interpreted differently in the future, the value of our ADSs or ordinary shares may decline in value or become worthless;
The approval of, filing or other procedures with the CSRC or other Chinese regulatory authorities may be required in connection with issuing securities to foreign investors under Chinese law, and, if required, we cannot predict whether we will be able, or how long it will take us, to obtain such approval or complete such filing or other procedures.
We may be exposed to liabilities under the U.S. Foreign Corrupt Practices Act, or FCPA, and Chinese anti-corruption laws, and any determination that we have violated these laws could have a material adverse effect on our business or our reputation;
Restrictions on currency exchange may limit our ability to receive and use financing in foreign currencies effectively;
We may rely on dividends and other distributions on equity paid by our Chinese subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our Chinese subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business;
Chinese regulations relating to the establishment of offshore special purpose companies by residents in mainland China may subject our China resident beneficial owners or our wholly foreign-owned subsidiaries in mainland China to liability or penalties, limit our ability to inject capital into these subsidiaries, limit these subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us;
Chinese regulations establish complex procedures for some acquisitions of mainland China based companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in mainland China;
Chinese manufacturing facilities have historically experienced issues operating in line with established GMPs and international best practices, and passing FDA, NMPA, and EMA inspections, which may result in a longer and costlier current GMP inspection and approval process by the FDA, NMPA, or EMA for our Chinese manufacturing processes and third-party contract manufacturers;
Our business benefits from certain financial incentives and discretionary policies granted by local governments. Expiration of, or changes to, these incentives or policies would have an adverse effect on our results of operations;
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It may be difficult for overseas regulators to conduct investigations or collect evidence within mainland China;
If we are classified as a Chinese resident enterprise for Chinese income tax purposes, such classification could result in unfavorable tax consequences to us and our
non-Chinese
shareholders or ADS holders;
We and our shareholders face uncertainties in mainland China with respect to indirect transfers of equity interests in Chinese resident enterprises;
Any failure to comply with Chinese regulations regarding the registration requirements for our employee equity incentive plans may subject us to fines and other legal or administrative sanctions, which could adversely affect our business, financial condition and results of operations;
Certain of our investments may be subject to review from the Committee on Foreign Investment in the United States, or CFIUS, which may delay or block a transaction from closing;
Changes in United States and international trade policies and relations, particularly with regard to mainland China, may adversely impact our business and operating results;
It may be difficult to enforce against us or our management in mainland China any judgments obtained from foreign courts;
Failure to renew our current leases or locate desirable alternatives for our leased properties could materially and adversely affect our business;
We have incurred significant losses since our inception and anticipate that we will continue to incur losses in the future. To date, we have not generated sufficient revenue from product sales to cover corresponding expenses, and we may never achieve or sustain profitability;
We are invested in the commercial success of our four approved products and our ability to generate product revenues in the near future is highly dependent on the commercial success of each of those products;
We rely on third parties to conduct our
pre-clinical
and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our products or product candidates and our business could be substantially harmed;
If we are unable to obtain and maintain patent protection for our products and product candidates through intellectual property rights, or if the scope of such intellectual property rights obtained is not sufficiently broad, third parties may compete directly against us;
If we fail to maintain proper internal financial reporting controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired; and
Other risks and uncertainties, including those described in the 2021 Annual Report.
These factors should not be construed as exhaustive and should be read with the other cautionary statements and information in our 2021 Annual Report and our other filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
The following table presents acquisitions of the Company’s ADSs to satisfy tax withholding obligations due in connection with exercise of option shares or vesting of restricted shares during the first quarter of 2023:

PeriodTotal Number of Shares (or Units) PurchasedAverage Price Paid per Share (or Unit)Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
January 1 – 31, 20232,661 $30.70 
February 1 – 28, 2023914 $42.50 
March 1 – 31, 2023123,658 $40.51 
Total127,233 
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
On May 9, 2023, we announced in our earnings release for the first quarter of 2023 the promotion of Joshua Smiley to President and Chief Operating Officer, effective April 1, 2023. Mr. Smiley, 53, joined the Company as our Chief Operating Officer in August 2022 following the completion of his leave with his prior employer. Mr. Smiley brings to the Company over 26 years of experience working in the biopharmaceutical industry, including experience leading finance, corporate strategy, business development, venture capital, and global business services operations. He is responsible for our corporate strategy and for overseeing our commercial, manufacturing, business development, finance, human resources, information technology, and corporate affairs functions.
None.
35

Table of ContentsPrior to joining the Company, Mr. Smiley worked for Eli Lilly and Company (“Lilly”) from 1995 to March 2022. While at Lilly, he held various global leadership roles with responsibility over finance, corporate strategy, business
27


development, and capital markets activities, including Senior Vice President and Chief Financial Officer from January 2018 to February 2021. Prior to joining Lilly, he worked in investment banking and consulting. Mr. Smiley received a B.A. in History from Harvard University.
In connection with Mr. Smiley’s promotion to President and Chief Operating Officer, and to better align his compensation with the market, the Compensation Committee of the Company’s Board of Directors has increased Mr. Smiley’s annual base salary to $650,000 and annual target bonus percentage to 60%, effective April 1, 2023.
Item 6. Exhibits.
Exhibit Index
Exhibit
Number
Exhibit
Title
10.1#
4.2
4.3Registrant’s Specimen Certificate for Ordinary SharesNon-Employee Director Compensation Policy (incorporated by reference to Exhibit 4.110.7 to our Registration StatementAnnual Report on Form S-810-K (File No. 333-264800)001-38205) filed with the SEC on May 9, 2022).March 1, 2023)
10.2#
4.5*31.1Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act
31.1*
31.2
31.2*
32.1
32.1**
32.2
32.2**
101.INS*
101.INS*Inline XBRL Instance
Document-the
instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*
101.SCH*Inline XBRL Taxonomy Extension Schema Document
101.CAL*
101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*
101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*
101.DEF*Inline XBRL Taxonomy Extension Definitions Linkbase Document
104*
104*Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

# Management contract or compensatory plan, contract, or arrangement.


*
Filed herewith
**
Furnished herewith
36
28

Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ZAI LAB LIMITED
Dated: May 10, 20229, 2023By:By:
/s/ Samantha Du
Billy Cho
Name:Name:Samantha DuBilly Cho
Title:Title:Chief Financial Officer
Chief Executive Officer(Principal Financial and Accounting Officer)
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