| Summary of significant accounting policies | 2. Summary of significant accounting policies (a) Basis of presentation The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Significant accounting policies followed by the Group in the preparation of the accompanying consolidated financial statements are summarized below. (b) Principles of consolidation The consolidated financial statements include the financial statements of the Company and its subsidiaries. All intercompany transactions and balances among the Group and its subsidiaries are eliminated upon consolidation. (c) Use of estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the period. Areas where management uses subjective judgment include, but are not limited to, estimating the useful lives of long-lived assets, estimating the current expected credit losses for financial assets, assessing the impairment of long-lived assets, discount rate of operating lease liabilities, revenue recognition, allocation of the research and development service expenses to the appropriate financial reporting period based on the progress of the research and development projects, share-based compensation expenses, recoverability of deferred tax assets and the fair value of the financial instruments. Management bases the estimates on historical experience and various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates. (d) Foreign currency translation The functional currency of Zai Lab Limited, Zai Lab (Hong Kong) Limited, Zai Lab (US) LLC and Zai Auto Immune (Hong Kong) Limited are the United States dollar (“$”). The Group’s PRC subsidiaries determined their functional currency to be Chinese Renminbi (“RMB”). The Group’s Australia subsidiary determined its functional currency to be Australian dollar (“A$”). The determination of the respective functional currency is based on the criteria of Accounting Standard Codification (“ASC”) 830, Foreign Currency Matters Assets and liabilities are translated from each entity’s functional currency to the reporting currency at the exchange rate on the balance sheet date. Equity amounts are translated at historical exchange rates, and expenses, gains and losses are translated using the average rate for the year. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive loss in the consolidated statements of changes in shareholders’ equity and comprehensive loss. Monetary assets and liabilities denominated in currencies other than the applicable functional currencies are translated into the functional currencies at the prevailing rates of exchange at the balance sheet date. Non-monetary rates. Transactions in currencies other than the applicable functional currencies during the year are converted into the functional currencies at the applicable rates of exchange prevailing at the transaction dates. Transaction gains and losses are recognized in the consolidated statements of operations. (e) Cash, cash equivalents and restricted cash Cash and cash equivalents The Group considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash and cash equivalents consist primarily of cash on hand, demand deposits and highly liquid investments with maturity of less than three months and are stated at cost plus interests earned, which approximates fair value. Restricted cash Restricted cash mainly consists of the bank deposits held as collateral for issuance of letters of credit. (f) Short-term investments Short-term investments are time deposits with original maturities more than three months. Short-term investments are stated at cost, which approximates fair value. Interest earned is included in interest income. (g) Accounts receivable From January 1, 2020, the Group adopted the ASU 2016-13, Credit Losses, Measurement of Credit Losses on Financial Instruments (h) Inventories Inventories are stated at the lower of cost or net realizable value, with cost determined on a weighted average basis. The Group periodically reviews the composition of inventory and shelf life of inventory in order to identify obsolete, slow-moving or otherwise non-saleable write-downs were (i) Investments in equity investees The Group uses the equity method to account for an equity investment over which it has significant influence but does not own a majority equity interest or otherwise control. The Group records equity method adjustments in share of earnings and losses. Equity method adjustments include the Group’s proportionate share of investee income or loss, adjustments to recognize certain differences between the Group’s carrying value and its equity in net assets of the investee at the date of investment, impairments, and other adjustments required by the equity method. Dividends received are recorded as a reduction of carrying amount of the investment. Cumulative distributions that do not exceed the Group’s cumulative equity in earnings of the investee are considered as a return on investment and classified as cash inflows from operating activities. Cumulative distributions in excess of the Group’s cumulative equity in the investee’s earnings are considered as a return of investment and classified as cash inflows from investing activities. The Group is required to perform an impairment assessment of its investments whenever events or changes in business circumstances indicate that the carrying value of the investment may not be fully recoverable. An impairment loss is recorded when there has been a loss in value of the investment that is other than temporary. No impairment was recorded for the years ended December 31, 2018, 2019 and 2020. (j) Prepayments for equipment The prepayments for equipment purchase are recorded in long term prepayments considering the prepayments are all related to property and equipment. (k) Property and equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets as follows:
Useful life
Office equipment 3 years
Electronic equipment 1.25-3
Vehicles 4 years
Laboratory equipment 5 years
Manufacturing equipment 10 years
Leasehold improvements lesser of useful life or lease term Construction in progress represents property and equipment under construction and pending installation and is stated at cost less impairment losses if any. (l) Lease From January 1, 2019, the Group adopted the ASC Topic 842, Leases The Group determines if an arrangement is a lease at inception. The Group classifies the lease as a finance lease if it meets certain criteria or as an operating lease when it does not. The Group has lease agreements with lease and non-lease At the commencement date of a lease, the Group recognizes a lease liability for future fixed lease payments and a right-of-use 2016-02, The ROU asset is measured at the amount of the lease liability with adjustments, if applicable, for lease prepayments made prior to or at lease commencement, initial direct costs incurred by the Group and lease incentives. Under ASC 842, land use rights agreements are also considered to be operating lease contracts. The Group will evaluate the carrying value of ROU assets if there are indicators of impairment and review the recoverability of the related asset group. If the carrying value of the asset group is determined to not be recoverable and is in excess of the estimated fair value, the Group will record an impairment loss in other expenses in the consolidated statements of operations. ROU assets for operating leases are included in operating lease right-of-use Operating leases are included in operating lease right-of-use Lease expense is recognized on a straight-line basis over the lease term. (m) Land use rights All land in the PRC is owned by the PRC government. The PRC government may sell land use rights for a specified period of time. The purchase price of land use rights represents the operating lease prepayments for the rights to use the land in the PRC under ASC 842 and is recorded as land use rights on the balance sheet, which is amortized over the remaining lease term. In 2019, the Group acquired land use rights from the local Bureau of Land and Resources in Suzhou for the purpose of constructing and operating the research center and biologics manufacturing facility in Suzhou. The land use rights are being amortized over the respective lease terms, which are 30 years. (n) Long term deposits Long term deposits represent amounts paid in connection with the Group’s long-term lease agreements. (o) Value added tax recoverable Value added tax recoverable represent amounts paid by the Group for purchases. The amounts were recorded as long-term assets considering they are expected to be deducted from future value added tax payables arising on the Group’s future revenues. (p) Intangible assets Intangible assets mainly consist of externally purchased software which are amortized over one (q) Impairment of long-lived assets Long-lived assets are reviewed for impairment in accordance with authoritative guidance for impairment or disposal of long-lived assets. Long-lived assets are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. Long-lived assets are reported at the lower of carrying amount or fair value less cost to sell. For the years ended December 31, 2018, 2019 and 2020, there was no impairment of the value of the Group’s long-lived assets. (r) Fair value measurements The Group applies ASC topic 820 (“ASC 820”), Fair Value Measurements and Disclosures ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 — Include other inputs that are directly or indirectly observable in the marketplace. Level 3 — Unobservable inputs which are supported by little or no market activity. ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (i) market approach; (ii) income approach; and (iii) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset. Financial instruments of the Group primarily include cash, cash equivalents and restricted cash, short-term investments, accounts receivable, prepayments and other current assets, short-term borrowings, accounts payable and other current liabilities. As of December 31, 2019 and 2020, the carrying values of cash and cash equivalents, short-term investments, accounts receivable, prepayments and other current assets, short-term borrowings, 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 approximates its fair value based on the nature and the assessment of the ability to recover these amounts. (s) Revenue recognition In 2018, the Group adopted of ASC Topic 606 (“ASC 606”), Revenue from Contracts with Customers, . m The Group’s revenue is all from product sales. The Group recognizes revenue from product sales when the Group has satisfied the performance obligation by transferring control of the product to the customers. Control of the product generally transfers to the customers when the delivery is made and when title and risk of loss transfers to the consumers. Cost of sales mainly consists of the acquisition cost of products and royalty fee. The Group has applied the practical expedients under ASC 606 with regard to assessment of financing component and concluded that there is no significant financing component given that the period between delivery of goods and payment is generally one year or less. The Group started to generate product sales revenue since 2018. For the year ended December 31, 2019 and 2020, the Group’s product revenues were mainly generated from the sale of ZEJULA (niraparib) and Optune (Tumor Treating Fields) to customers. In China, the Group sells the products to distributors, who ultimately sell the products to health care providers. Based on the nature of the arrangements, the performance obligations are satisfied upon the products delivery to distributors. Rebates are offered to distributors, consistent with pharmaceutical industry practices. The estimated amount of unpaid or unbilled rebates are recorded as a reduction of revenue if any. Estimated rebates are determined based on contracted rates, sales volumes and distributor inventories. The Group regularly reviews the information related to these estimates and adjusts the amount accordingly. In Hong Kong, the Group sells the products to customers, which are typically healthcare providers such as oncology centers. The Group utilizes a third party for warehousing services. Based on the nature of the arrangement, the Group has determined that it is a principal in the transaction since the Group is primarily responsible for fulfilling the promise to provide the products to the customers, maintains inventory risk until delivery to the customers and has latitude in establishing the price. Revenue was recognized at the amount to which the Group expected to be entitled in exchange for the sale of the products, which is the sales price agreed with the customers. Consideration paid to the third party is recognized in operating expenses. The Group didn’t recognize any contract assets and contract liabilities as of December 31, 2019 and 2020. (t) Research and development expenses Elements of research and development expenses primarily include (i) payroll and other related costs of personnel engaged in research and development activities; (ii) in-licensed pre-clinical The Group has acquired rights to develop and commercialize product candidates. Upfront payments that relate to the acquisition of a new product compound, as well as pre-commercial in-process (u) Deferred income Deferred income mainly consists of deferred income from government grants, American Depositary Receipts (the “ADR”) Program Agreement with ADR depositary bank (the “DB”) in July 2017 and the upfront payments received from Huizheng (Shanghai) Pharmaceutical Technology Co., Ltd. (“Hanhui”). Government grants consist of cash subsidies received by the Group’s subsidiaries in the PRC from local governments. Grants received as incentives for conducting business in certain local districts with no performance obligation or other restriction as to the use are recognized when cash is received. Cash grants of $1,332, $2,151 and $7,289 were included in other income for the years ended December 31, 2018, 2019 and 2020, respectively. Grants received with government specified performance obligations are recognized when all the obligations have been fulfilled. If such obligations are not satisfied, the Group may be required to refund the subsidy. Cash grants of $2,023 and $2,519 were recorded in deferred income as of December 31, 2019 and 2020 respectively, which will be recognized when the government specified performance obligation is satisfied. According to the ADR program agreement, the Group has the right to receive reimbursements for using DB’s services, subject to the compliance by the Group with the terms of the agreement. The Group performed a detail assessment of the requirements and recognizes the reimbursements it expects to be entitled to over the five-year In March 2020, the Group entered into an exclusive promotion agreement with Hanhui. Under the terms of the agreement, the Group will leverage Hanhui’s existing infrastructure to optimize an anticipated future commercial launch of omadacycline in China given that omadacycline is a broad-spectrum antibiotic in both the hospital and community care facilities. In exchange for the exclusive promotion rights in China, Hanhui has agreed to pay the Group a non-creditable, upfront payment in the amount of of 90,000 (v) Comprehensive loss Comprehensive loss is defined as the changes in equity of the Group during a period from transactions and o t Comprehensive Income (w) Share-based compensation The Group grants share options and non-vested Compensation-Stock Compensation. Employees’ share-based awards are measured at the grant date fair value of the awards and recognized as expenses (i) immediately at grant date if no vesting conditions are required; or (ii) using graded vesting method over the requisite service period, which is the vesting period. All transactions in which goods or services are received in exchange for equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. To the extent the required vesting conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating to those awards are reversed. The Group determined the fair value of the stock options granted to employees using the Black-Scholes option valuation model. Awards Granted to Non-Employees The Group grants share options to eligible Non-Employees Compensation-Stock Compensation. Non-Employees’ issued, whichever is more reliably measurable. To the extent the required vesting conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating to those awards are reversed. The Group determined the fair value of the stock options granted to Non-Employees (x) Income taxes Income tax expense includes (i) deferred tax expense, which generally represents the net change in the deferred tax asset or liability balance during the year plus any change in valuation allowances; (ii) current tax expense, which represents the amount of tax currently payable to or receivable from a taxing authority; and (iii) non-current The Group recognizes deferred tax assets and liabilities for temporary differences between the financial statement and income tax bases of assets and liabilities, which are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Group evaluates its uncertain tax positions using the provisions of ASC 740, Income Taxes (y) Earnings (loss) per share Basic earnings (loss) per ordinary share is computed by dividing net income (loss) attributable to ordinary shareholders by weighted average number of ordinary shares outstanding during the period. Diluted earnings (loss) per ordinary share reflects the potential dilution that could occur if securities were exercised or converted into ordinary shares. The Group had stock options and non-vested non-vested (z) Segment information In accordance with ASC 280, Segment Reportin (aa) Concentration of risks Concentration of customers The following customers accounted for 10% or more of revenue for the years en d
Year ended December 31,
2018 2019 2020
$ $ $
A 51 5,397 *
B 34 * *
C 14 * *
D * 4,682 *
E * * 15,774
* Represents less than 10% of revenue for the years ended December 31, 2018, 2019 and 2020. Concentration of suppliers The following suppliers accounted for 10% or more of research and development expenses and the inventory purchases for the years ended December 31, 2018, 2019 and 2020:
Year ended December 31,
2018 2019 2020
$ $ $
A 25,515 * *
B 14,664 * *
C * 27,966 *
D * 18,362 *
E * * 33,564
F * * 26,710
* Represents less than 10% of research and development expenses and the inventory purchases for the years ended December 31, 2018, 2019 and 2020. Concentration of credit risk Financial instruments that are potentially subject to significant concentration of credit risk consist of cash and cash equivalents, and short-term investments. The carrying amounts of cash and cash equivalents and short-term investments represent the maximum amount of loss due to credit risk. As of December 31, 2019 and 2020, all of the Group’s cash and cash equivalents and short-term investments were held by major financial institutions located in the PRC and international financial institutions outside of the PRC which management believes are of high credit quality and continually monitors the credit worthiness of these financial institutions. Foreign currency risk RMB is not a freely convertible currency. The State Administration of Foreign Exchange, under the authority of the People’s Bank of China, 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 Group included aggregated amounts of RMB47,168 and RMB155,934, which were denominated in RMB, as of December 31, 2019 and 2020, respectively, representing 9% and 5% of the cash and cash equivalents as of December 31, 2019 and 2020, respectively. (ab) Recent accounting pronouncements Adopted Accounting Standards In June 2016, the FASB issued ASU 2016-13, Credit Losses, Measurement of Credit Losses on Financial Instruments 2018-19, 2019-04, 2019-05, 2019-10, 2019-11 2020-03. The Group adopted the standard on January 1, 2020. Based on the composition of the Group’s trade receivables and investment portfolio, the adoption of this standard did not have a material impact on the Group’s financial position or results of operations upon adoption. The Group has updated its accounting policy for accounts receivable and is providing additional disclosure about its allowance for credit losses, as required by the standard, upon adoption. The impact of other financial instrument is not material. In August 2018, the FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808) Future Adoption of Accounting Standards In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes Income taxes e |
