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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,June 30, 2022
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 LIMITED
(Exact Name of Registrant as Specified in its Charter)
____________________
Cayman Islands
98-1144595
(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer

Identification No.)
4560 Jinke Road
Bldg. 1, Fourth Floor,
Pudong
Shanghai
Shanghai, China
201210
314 Main Street
4th Floor, Suite 100
Cambridge, MA, USA
02142
(Address of principal executive offices)
(Zip Code)
+86 21 6163216163 2588
(Registrant’s Telephone Number, Including Area Code)
____________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Trading
Symbol(s)
Name of each exchange
on which registered
American Depositary Shares, each representing 10 Ordinary Share, 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 ☒x No ☐o
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 ☒x No ☐o
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 filerx☒Accelerated filer☐o
Non-accelerated filero
Non-accelerated
filer		☐Smaller reporting company☐o
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. ☐o
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). Yes ☐o No ☒x
As of May 5,August 3, 2022, 979,087,430 ordinary shares of the registrant, par value $0.000006 per share, were outstanding, of which 729,604,650743,559,650 ordinary shares were held in the form of American Depositary Shares.

Table of Contents
Zai Lab Limited
Quarterly Report on Form
10-Q
Page
1
PART I.
Item 1.
1
Item 1.
Financial Statements (Unaudited)
2
Condensed Consolidated Balance Sheets as of March 31,June 30, 2022 and December 31, 2021
2
Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31,June 30, 2022 and 2021
3
Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended March 31,June 30, 2022 and 2021
4
Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended March 31, June 30, 2022 and 2021
5
Condensed Consolidated Statements of Cash Flows for the ThreeSix Months Ended March 31,June 30, 2022 and 2021
6
7
Notes to Unaudited Condensed Consolidated Financial Statements
7
8
17
18
28
32
29
33
30
34
30
34
30
34
35
36
35
36
35
36
35
36
Exhibits37
36
37
38
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SPECIAL NOTES REGARDING THE COMPANY

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements that involve risks and uncertainties. These forward-looking statements include, without limitation, statements containing words such as “aim,��” “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “plan,” “possible,” “potentially,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these terms or similar expressions. Such statements constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information, that are not statements of historical facts, nor are they guarantees or assurances of future performance. These forward-looking statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to inherent uncertainties, risks and changes in circumstances that may differ materially from those contemplated by the forward-looking statements because they relate to events and depend on circumstances that may or may not occur in the future. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including but not limited to the following:

•The effects of the COVID-19 pandemic, including any government actions and lockdown measures taken in response, particularly in mainland China where our operations 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 that may adversely impact our business, operating results, ability to raise capital, and market price of our ordinary shares and/or our ADSs;
•Actions the Chinese government may take to intervene in or influence our operations, 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 discussedADSs or ordinary shares worthless;
•Economic, political, and social conditions in mainland China, as well as governmental policies, that could affect the business environment and financial markets in mainland China and our ability to operate our business, liquidity, and access to capital;
•Uncertainties in the Chinese legal system that could materially and adversely affect us; including, particularly, 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, which may entail significant expenses for compliance and could materially affect our business;
•Any approval, filing, or procedural requirements by the CSRC or other Chinese regulatory authorities in connection with issuing securities to foreign investors under Chinese law, which could affect our ability to raise capital;
•Any violation or liability under the U.S. Foreign Corrupt Practices Act, or FCPA, or Chinese anti-corruption laws, which could have a material adverse effect on our business or reputation;
•Restrictions on currency exchange that could limit our ability to receive and use financing in foreign currencies effectively;
•Any limitation on the ability of our Chinese subsidiaries to make payments to us that could have a material and adverse effect on our ability to conduct our business or fund our cash and financing requirements;
•Chinese requirements on the ability of residents in mainland China to establish offshore special purpose companies by residents in mainland China, which 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 otherwise adversely affect us;
•Chinese regulations regarding 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;
•Any issues that our Chinese manufacturing facilities have with operating in conformity with established GMPs and international best practices, and passing FDA, NMPA, and EMA inspections, which could 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;
•Expiration of, or changes to, financial incentives or discretionary policies granted by local governments that could have an adverse effect on our results of operations;


•Any difficulty for overseas regulators to conduct investigations or collect evidence within mainland China that could adversely affect our business, compliance with regulatory requirements, ability to raise capital, and share price of our ordinary shares and ADSs;
•Any 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;
•Any failure to comply with applicable Chinese, U.S., and Hong Kong regulations that could lead to government enforcement actions, subject us to fines and other legal or administrative sanctions, or otherwise adversely affect our business, financial condition, and results of operations;
•Any review by the Committee on Foreign Investment in the United States, or CFIUS, in our investments, which may delay or block a transaction from closing;
•Failure to renew our current leases or locate desirable alternatives for our leased properties which could materially and adversely affect our business;
•Our ability to generate revenues from our four approved 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 could adversely affect our ability to obtain regulatory approval for, or commercialize, our products or product candidates; and
•Any inability to obtain or maintain sufficient patent protection for our products and product candidates could adversely affect our business by allowing third parties to compete directly against us.

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 filed with the U.S. Securities and Exchange Commission (SEC) on March 1, 2022 (the “2021 Annual Report”), our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 filed with the SEC on May 10, 2022 (Q1 2022 Form 10-Q), and in this Quarterly Report on Form 10-Q. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this Quarterly Report on Form 10-Q, speak only as of their date. We anticipate that subsequent events and developments will cause our expectations and assumptions to change, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Usage of Terms

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Greater China” refer to mainland China, Hong Kong Special Administrative Region (“HKSAR” or “HongHong Kong”), 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 purchasing 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, Zai Anti Infectives (Hong Kong) Limited has non-substantial business operations.

Disclosures Relating to Our Chinese Operations

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 will 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. 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. 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 shares 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 that 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 may materially and adversely affect our business, financial condition, results of operations, and the market price of our ADSs or ordinary shares.

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There are significant legal and operational risks associated with conducting a substantial portion of our operations in mainland China, including that 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 may materially and adversely affect our business, financial condition, results of operations, and the market price of our ADSs or ordinary shares. Any such changes could significantly limit or completely hinder our ability to offer or continue to offer our ADSs or ordinary shares to investors and could cause the value of our ADSs or ordinary shares to significantly decline or become worthless. RecentFor example, geopolitical events, such as the visit by the Speaker of the U.S. House of Representatives to Taiwan in August 2022, continue to cause heightened tensions between the United States and China, which could have potential adverse effects on our business, results of operations, ability to raise capital or raise capital on favorable terms, or the market price of our ordinary shares and/or ADSs. In addition, 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 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.
We are required to obtain certain permissions from Chinese authorities to operate,in mainland China, 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 ability to operate in mainland China may be undermined if 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, in January 2022, 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, 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.Report.



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.
(“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. Each of our Chinese subsidiaries has obtained a valid business license from the local counterpart of the SAMR, and no application for any such license has been denied. Our Chinese subsidiaries are also required to obtain certain licenses and permits, including but not limited to the following material licenses and permits: 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.

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Because the majority of our operations are in mainland China andprior auditor, which filed an audit report with our auditor has beenlast annual report, was located in mainland China, a jurisdiction where the U.S. Public Company Accounting Oversight Board (“PCAOB”) is currently unable to conduct inspections without the approvalinspect or investigate completely because of restrictions imposed by 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 thatin March 2022. Because the PCAOB is unable to inspect or investigate completely. Although in April 2022 our Audit Committee approved the engagement ofCompany subsequently engaged KPMG LLP (“KPMG”), a U.S. auditor that is subject to inspection and review by the PCAOB, asto be our independent registered public accounting firm for the fiscal year ending December 31, 2022 KPMG isand because the Company has a principal executive office, significant operations, and a majority of our Board members and executives in the processUnited States, we believe we have mitigated our risk of concluding its standard client evaluation procedures, including obtaining approval from the Hong Kong Stock Exchange to audit the Company’s consolidated financial statements submitteddelisting pursuant to the Hong Kong Stock Exchange. If for any reasonHFCAA. However, if we continuewere to fail to meet the audit requirements of the HFCAA for three consecutive years (or two years, if bills passed by the HFCAA requires the SEC to prohibit the tradingU.S. Senate or House of Representatives are enacted), we may be prohibited from listing our securities on a national securities exchange including Nasdaq, or on over-the-counter marketsmarket in the United States. In addition, the U.S. SenateStates 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 Nasdaq Global Market (“Nasdaq”). The foregoing could adversely affect the market price of our ordinary shares 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, inIn recent years, the U.S. Congress and regulatory authorities have continued to expressexpressed 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 auditmainland China, and other information currently protected by national law, in particular under Chinese law,December 2020, the United States enacted the HFCAA in December 2020.HFCAA. 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”). The PCAOB has issued a Determination Report, 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, and in March 2022, SEC staff conclusively identified the Company as a Commission-Identified Issuer because our prior auditor, which filed an audit report with our 2021 Annual Report, was located in mainland China.

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 passedIf either 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,passed by the U.S. House of Representatives passedSenate in June 2021 or the America Creating Opportunities for Manufacturing Pre-Eminence in Technology and Economic Strength (COMPETES) Act of 2022 (the “America COMPETES Act”), which similarly would amendpassed by the HFCAA to shortenU.S. House of Representatives in February 2022 are enacted, the number of non-inspection years would be reduced 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.
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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 MarchMay 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 ofengaged 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 for2022. In addition, we have a principal executive office, significant operations, and a majority of our Board members and executive officers in the annual consolidated financial statementsUnited States. As a result, we believe that we have mitigated our risk 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 submitteddelisting pursuant to the Hong Kong Stock Exchange in accordance with the Rules Governing the Listing of Securities of the Hong Kong Stock Exchange, subjectHFCAA. However, if we were to the Company’s receipt of the approval from the Hong Kong Stock Exchange and the FRC. Even though such approval is expectedfail 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 withmeet the audit requirements of the HFCAA. Additionally, evenHFCAA for three consecutive years (or two years if KPMGthe number of non-inspection years is approved asreduced by legislation), our auditor bysecurities may be prohibited from trading on the Hong Kong Stock ExchangeNasdaq or other U.S. stock exchanges, and the FRC, there remains a risk that the CSRCthis ultimately could result in our ADSs being delisted. Delisting of our ADSs would force holders of our ADSs to sell their ADSs or another Chinese governmental agency could limit or prohibitconvert them into our ability to use KPMG as our auditor.ordinary shares. 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 also 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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PART I – FINANCIAL INFORMATION
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial information and the accompanying notes included in our 2021 Annual Report.
1
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Item 1. Financial
Statements.
Zai Lab Limited
Unaudited condensed consolidated balance sheets
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
NotesJune 30,
2022		December 31,
2021
$$
Assets
Current assets:
Cash and cash equivalents3680,820 964,100 
Short-term investments575,274 445,000 
Accounts receivable (net of allowance for credit loss of $8 and $11 as of June 30, 2022 and December 31, 2021, respectively)27,054 47,474 
Notes receivable10,968 7,335 
Inventories, net423,339 18,951 
Value added tax recoverable - current219 — 
Prepayments and other current assets17,973 18,021 
Total current assets1,335,647 1,500,881 
Restricted cash, non-current803 803 
Long term investments (including the fair value measured investment of $2,827 and $15,383 as of June 30, 2022 and December 31, 2021, respectively)2,827 15,605 
Prepayments for equipment4,542 989 
Property and equipment, net546,419 43,102 
Operating lease right-of-use assets18,596 14,189 
Land use rights, net7,286 7,811 
Intangible assets, net1,673 1,848 
Long-term deposits947 870 
Value added tax recoverable37 23,858 
Total assets1,418,777 1,609,956 
Liabilities and shareholders’ equity  
Current liabilities:  
Accounts payable108,443 126,163 
Current operating lease liabilities6,824 5,927 
Other current liabilities853,610 60,811 
Total current liabilities168,877 192,901 
Deferred income24,775 27,486 
Non-current operating lease liabilities12,960 9,613 
Total liabilities206,612 230,000 
Commitments and contingencies (Note 14)0 0 
Shareholders’ equity  
Ordinary shares (par value of $0.000006 per share; 5,000,000,000 shares authorized; 960,520,140 and 955,363,980 shares issued as of June 30, 2022 and December 31, 2021, respectively; 958,494,830 and 954,981,050 shares outstanding as of June 30, 2022 and December 31, 2021, respectively)6 6 
Additional paid-in capital2,857,202 2,825,948 
Accumulated deficit(1,638,401)(1,418,074)
Accumulated other comprehensive income (loss)4,487 (23,645)
Treasury Stock (at cost, 2,025,310 and 382,930 shares as of June 30, 2022 and December 31, 2021, respectively)(11,129)(4,279)
Total shareholders’ equity1,212,165 1,379,956 
Total liabilities and shareholders’ equity1,418,777 1,609,956 
       
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
)
        0    0  
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
Table of Contents

Zai Lab Limited
Unaudited condensed consolidated statements of operations
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
Three Months Ended June 30,Six Months Ended June 30,
Notes2022202120222021
$$$$
Revenues:
Product revenue, net647,575 36,935 93,670 57,038 
Collaboration revenue6601 — 1,230 — 
Total revenues48,176 36,935 94,900 57,038 
Expenses:  
Cost of sales(17,407)(10,868)(33,051)(18,373)
Research and development(66,084)(142,224)(119,938)(346,076)
Selling, general, and administrative(63,401)(54,414)(120,392)(90,252)
Loss from operations(98,716)(170,571)(178,481)(397,663)
Interest income1,175 244 1,363 458 
Other income (expenses), net(40,392)7,406 (42,988)1,179 
Loss before income tax and share of loss from equity method investment(137,933)(162,921)(220,106)(396,026)
Income tax expense7— — — — 
Share of loss from equity method investment— (403)(221)(208)
Net loss(137,933)(163,324)(220,327)(396,234)
Net loss attributable to ordinary shareholders(137,933)(163,324)(220,327)(396,234)
Loss per share - basic and diluted9(0.14)(0.18)(0.23)(0.44)
Weighted-average shares used in calculating net loss per ordinary share - basic and diluted 957,684,820 930,455,310 956,603,250 907,231,320 
Loss per American Depositary Shares (“ADS”) - basic and diluted(1.44)(1.76)(2.30)(4.37)
Weighted-average ADSs used in calculating net loss per ADS - basic and diluted 95,768,482 93,045,531 95,660,325 90,723,132 
       
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
Table of Contents

Zai Lab Limited
Unaudited condensed consolidated statements of comprehensive loss
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
$$$$
Net loss(137,933)(163,324)(220,327)(396,234)
Other comprehensive income (loss), net of tax of NaN:
Foreign currency translation adjustments30,325 (5,241)28,132 (2,341)
Comprehensive loss(107,608)(168,565)(192,195)(398,575)
   
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) 
          
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Table of Contents

Zai Lab Limited
Unaudited condensed consolidated statements of shareholders’ equity
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)

Ordinary SharesAdditional
paid
in capital		Accumulated
deficit		Accumulated
other
comprehensive
(loss) income		Treasury StockTotal
Number
of
Shares		AmountSharesAmount
$$$$$$
Balance at December 31, 2021955,363,980 6 2,825,948 (1,418,074)(23,645)(382,930)(4,279)1,379,956 
Issuance of ordinary shares upon vesting of restricted 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 6 2,838,655 (1,500,468)(25,838)(398,080)(4,347)1,308,008 
Issuance of ordinary shares upon vesting of restricted shares683,700 00— — — — — 
Exercise of shares options2,801,000 04,322 — — — — 4,322 
Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation— — — — — (1,627,230)(6,782)(6,782)
Share-based compensation— — 14,225 — — — — 14,225 
Net loss— — — (137,933)— — — (137,933)
Foreign currency translation— — — — 30,325 — — 30,325 
Balance at June 30, 2022960,520,140 6 2,857,202 (1,638,401)4,487 (2,025,310)(11,129)1,212,165 




5
   
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
(loss) income		Treasury StockTotal
Number
of
Shares		AmountSharesAmount
$$$$$$
Balance at December 31, 2020878,110,260 5 1,897,467 (713,603)(14,524)— — 1,169,345 
Issuance of ordinary shares upon vesting of restricted shares816,000 00— — — — — 
Exercise of shares options583,640 0702 — — — — 702 
Issuance of ordinary shares in connection with collaboration and license arrangement5,681,820 062,250 — — — — 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, 2021885,191,720 5 1,967,802 (946,513)(11,624)— — 1,009,670 
Issuance of ordinary shares upon vesting of restricted shares321,000 00— — — — — 
Exercise of shares option4,905,170 03,289 — — — — 3,289 
Issuance of ordinary shares upon follow-on public offering, net of issuance cost of $87957,164,000 1 817,995 — — — — 817,996 
Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation— — — — — (60,860)(924)(924)
Share-based compensation— — 10,232 — — — — 10,232 
Net loss— — — (163,324)— — — (163,324)
Foreign currency translation— — — — (5,241)— — (5,241)
Balance at June 30, 2021947,581,890 6 2,799,318 (1,109,837)(16,865)(60,860)(924)1,671,698 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. “0” in above table means less than 1,000 dollars.
56

Table of Contents
Zai Lab Limited
Unaudited condensed consolidated statements of cash flows
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
Six Months Ended
June 30,
20222021
$$
Operating activities
Net loss(220,327)(396,234)
Adjustments to reconcile net loss to net cash used in operating activities:  
Allowance for credit loss(3)4 
Inventory write-down193 290 
Depreciation and amortization expenses3,874 2,975 
Amortization of deferred income(1,386)(156)
Share-based compensation26,634 17,550 
Noncash research and development expenses— 62,250 
Share of loss from equity method investment221 208 
Loss from fair value changes of equity investment with readily determinable fair value12,556 — 
(Gain) loss on disposal of property and equipment(11)4 
Noncash lease expenses3,825 2,779 
Changes in operating assets and liabilities:  
Accounts receivable20,422 (12,868)
Notes receivable(3,633)— 
Inventories(4,582)1,740 
Prepayments and other current assets48 (1,953)
Long-term deposits(78)(29)
Value added tax recoverable23,602 (1,682)
Accounts payable(17,718)62,980 
Other current liabilities29,510 28,078 
Operating lease liabilities(3,849)(2,214)
Deferred income(1,325)930 
Net cash used in operating activities(132,027)(235,348)
Cash flows from investing activities:  
Purchases of short-term investments(260,274)— 
Proceeds from maturity of short-term investment130,000 743,902 
Purchase of property and equipment(13,488)(5,647)
Purchase of intangible assets(107)(427)
Net cash (used in) provided by investing activities(143,869)737,828 
Cash flows from financing activities:  
Proceeds from exercises of stock options4,619 3,992 
Proceeds from issuance of ordinary shares upon public offerings— 818,874 
Payment of public offering costs— (1,323)
Employee taxes paid related to net share settlement of equity awards(6,859)(594)
Net cash (used in) provided by financing activities(2,240)820,949 
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash(5,144)1,028 
Net (decrease) increase in cash, cash equivalents and restricted cash(283,280)1,324,457 
Cash, cash equivalents and restricted cash - beginning of period964,903 442,859 
Cash, cash equivalents and restricted cash - end of period681,623 1,767,316 
Supplemental disclosure on non-cash investing and financing activities:  
Payables for purchase of property and equipment1,661 1,720 
Payables for intangible assets270 58 
Payables for public offering costs— 555 
Payables for treasury stock17 — 
Receivables for stock option exercise under equity incentive plans12 — 
Right-of-use asset acquired under operating leases8,451 — 
Supplemental disclosure of cash flow information:  
Cash and cash equivalents680,820 1,766,573 
Restricted cash, non-current803 743 
Total cash and cash equivalents and restricted cash681,623 1,767,316 
   
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
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)

1. Organization and principal activities

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

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 of the Company have been prepared in accordance with the instructions to Form
10-Q
and Article 10 of Regulation
S-X.
Accordingly, they do not include all information and disclosures necessary for a presentation of the Company’s financial position, results of operations, shareholders’ equity and cash flows in conformity with U.S. generally accepted accounting principles 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 Quarterly Report on Form 10-Q 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, 2021 filed with the SEC on March 1, 2022 (the “2021 Annual Report”). InThe December 31, 2021 condensed consolidated balance sheet data included in this Quarterly Report on Form 10-Q were derived from the opinion of management, theseaudited financial statements included in the 2021 Annual Report.

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-K2022.
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 ten10 ordinary shares (the “Share Subdivision”). Following the Share Subdivision, the Company’s authorized share capital became $30$30,000 divided into 5,000,000,000 shares with a par value of US$0.000006 each.per share. 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 one1 ordinary share to a new ratio of one ADS representing ten10 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 consolidation
The unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All intercompany transactions and balances among the Company and its subsidiaries are eliminated upon consolidation.
(c) Use of estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of 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, and assessing the impairment of long-lived assets, discount rate of operating lease liabilities, accrual of rebate,rebates, allocation of the research and development service expenses to the appropriate financial reporting period based on the progress of the research and development projects, share-based compensation expenses, recoverability of deferred tax assets, and a lack of
8

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
marketability discount of the ordinary shares issued in connection with collaboration and license arrangements (Note 1
2
)12). Management bases theits 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.
7
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)
(d) Fair value measurements
As of March 31,June 30, 2022 and December 31, 2021, information about inputs into the fair value measurement 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:

follows (in thousands):
DescriptionFair Value as of
June 30, 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 Value2,827 2,827 
DescriptionFair Value as of
December 31, 2021
US$
Fair Value Measurement at Reporting
Date Using Quoted Prices in Active
Markets
for Identical
Assets (Level 1)
US$
Equity Investments with Readily Determinable Fair Value15,383 15,383 
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 doesdid 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,June 30, 2022 and December 31, 2021, 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
Adopted Accounting Standardsaccounting standards
In November 2021, 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.
9

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(f) Significant accounting policies
For a more complete discussion of the Company’s significant accounting policies, and other information, the unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements included in the Company’s2021 Annual Report on Form
10-K
for the year ended December 31, 2021.
8
Report.
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)
3. Cash and cash equivalents
The following table presents the Company's cash and cash equivalents as of June 30, 2022 and December 31, 2021 (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:
June 30, 2022December 31, 2021
$$
Cash at bank and in hand381,225 663,472 
Cash equivalents (i)299,595 300,628 
 680,820 964,100 
Denominated in:  
US$611,478 932,888 
RMB (ii)63,359 23,791 
Hong Kong dollar (“HK$”)5,138 6,674 
Australian dollar (“A$”)614 475 
Taiwan dollar (“TW$”)231 272 
680,820 964,100 
(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 $20,288$23.3 million and $18,951$19.0 million as of March 31,June 30, 2022 and December 31, 2021, respectively, 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. The following table presents the Company’s inventories, net, as of June 30, 2022 and December 31, 2021 (in thousands):
June 30, 2022December 31, 2021
$$
Finished goods4,342 5,632 
Raw materials18,476 13,231 
Work in Progress521 88 
Inventories, net23,339 18,951 
         
   
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 
           

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 and six months ended March 31,June 30, 2022, the Company recorded write-downs of $0.1 million and $0.2 million, respectively, in cost of sales. During the three and six months ended June 30, 2021, the Company recorded write-downs of $138$0.3 million and $43,$0.3 million, respectively, in cost of revenues, respectively.
sales.
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Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
5
.5. Property and equipment, net
PropertyThe following table presents the Company's components of property and equipment,
, net
consist as of the following:June 30, 2022 and December 31, 2021 (in thousands):
June 30, 2022December 31, 2021
$
$
Office equipment822 836 
Electronic equipment6,370 5,036 
Vehicle210 220 
Laboratory equipment18,593 17,069 
Manufacturing equipment13,984 14,600 
Leasehold improvements10,230 10,432 
Construction in progress15,343 11,334 
65,552 59,527 
Less: accumulated depreciation(19,133)(16,425)
Property and equipment, net46,419 43,102 
         
   
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 $1.7 million and $3.6 million for the three
and six months
ended March 31,June 30, 2022, respectively, and 2021 were $1,869$1.4 million and $1,340,$2.7 million for the three and six months ended June 30, 2021, respectively.
6. Revenue
Product revenue, net
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 and six months ended March 31,June 30, 2022 and 2021.2021 (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
$
$
$
$
Product revenue - gross54,339 41,380 107,649 87,935 
Less: Rebate and sales return(6,764)(4,445)(13,979)(30,897)
Product revenue - net47,575 36,935 93,670 57,038 
         
   
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 toThe Company lowered the inclusionselling price of ZEJULA due to its inclusion in the National Reimbursement Drug List (“NRDL”) in December 2020 and December 2021 for certain therapies,therapies. Accordingly, the Company accrued $0.3 million and $2.9 million for sales rebates
of
$2,587 and $22,009 as compensation to distributors in mainland China for those products previously sold at the price prior to the NRDL implementation during the three and six months ended June 30, 2022, respectively, and NaN and $22.0 million during the three and six months ended June 30, 2021, respectively.

In June 2022, the Company lowered the selling price for QINLOCK and NUZYRA. Accordingly, the Company accrued $2.9 million of sales rebates as compensation to distributors in mainland China for those products previously sold at the price prior to the reduction during the three months ended March 31, 2022 and 2021,
respectively.June 30, 2022.
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 
           
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11

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”)The following table presents net revenue by product for the three and Renminbi (“RMB”) except for number of sharessix months ended June 30, 2022 and per share data)
2021 (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
$$$$
ZEJULA34,052 23,366 63,649 35,972 
Optune11,592 9,535 24,389 16,665 
QINLOCK623 4,034 3,582 4,401 
NUZYRA1,308 — 2,050 — 
Product revenue - net47,575 36,935 93,670 57,038 
Collaboration revenue
The Company’s collaboration revenue for the three and six months ended March 31,June 30, 2022 amounted to $629of $0.6 million and $1.2 million, respectively, was from the
its collaborative arrangement with Huizheng (Shanghai) Pharmaceutical Technology Co., Lt
d.
Ltd.
7. Income Tax
NoNaN 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,
June 30, 2022 and December 31, 2021. NaNNo unrecognized tax benefits and related interest and penalties were recorded in any of the periods presented.
8. Other current liabilities
OtherThe following table presents the Company's other current liabilities consistas of the following:June 30, 2022 and December 31, 2021 (in thousands):
         
   
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:
June 30,
2022		December 31,
2021
$$
 Payroll18,976 25,685 
 Accrued rebate to distributors11,249 15,001 
 Tax payables9,896 8,817 
 Accrued professional service fee6,450 4,319 
 Other (i)5,827 4,421 
 Payables for purchase of property and equipment1,212 2,568 
Total53,610 60,811 
(i)Other primarily consists of tax withholding related to share-based compensation and accrued travel and business entertainment expenses.
(i)Others are mainly payables to employees for exercising the share-based compensations, payables related to travel and business entertainment expenses.
9
.9. Loss per share

BasicThe following table presents the computation of the basic and diluted net loss per share for each of the period presented are calculated as follows:
three and six months ended June 30, 2022 and 2021 (in thousands, except share and per share data):
         
   
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) 
           

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Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
$$$$
Numerator:
Net loss attributable to ordinary shareholders(137,933)(163,324)(220,327)(396,234)
Denominator:
Weighted average number of ordinary shares - basic and diluted957,684,820 930,455,310 956,603,250 907,231,320 
Net loss per share - basic and diluted(0.14)(0.18)(0.23)(0.44)
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
As
a result of the Company’s net loss for the three and six months ended March 
31
,
June 30, 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 would have been anti-dilutive.
June 30,
2022		June 30,
2021
Share options91,546,280 86,294,400 
Non-vested restricted shares34,356,250 6,325,350 
         
   
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​​​​​​​
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 $0.2 million and $0.1 million during the three and six months ended June 30, 2022, respectively, and $0.3 million and $0.2 million, during the three and six months ended June 30, 2021, respectively.
1
1
.11. Share-based compensation
Share options
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 initial public offering (the “IPO”), of the Company, 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, 2022, the number of shares reserved under the 2017 Plan
increased by 38,563,500. The aggregate number of shares reserved and available for issuance under ourthe 2017 Plan as of April 1, 2022 was
75,562,170.
On April 20,June 22, 2022, at the Board2022 Annual General Meeting of DirectorsShareholders of the Company (the “Annual General Meeting”), the Company’s shareholders approved the Zai Lab Limited 2022 Equity Incentive Plan (the “2022 Plan”), which iswas previously approved by the Company’s 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 as of the effective date of the 2022 Plan.
Plan.

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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 threesix months ended March 31, 2021,June 30, 2022, the Company granted 151,00017,885,480 share options and 27,360,150 share of non-vested restricted shares to certain management and employees of the Company at the exercise price $16.20 per share under the 2017 Plan. TheseThe share options were granted at an exercise price ranging from $2.95 to $6.29 per share with a weighted-average grant-date fair value of $2.84 per share.

The options granted have a contractual term of ten years and generally vest over a five-year period, with 20% of the awards vesting beginning on the anniversary date one year after the grant date.
For the three months ended March 31, 2022, the Company The non-vested restricted shares granted 984,310 share options 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 term of ten years and generally vest over a five-yearfive- or four-year period, with 20% or 25% 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. 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’award holders’ 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, 2021, 31,000 ordinary shares were authorized for grant to certain management. One-fifth
 of the restricted shares will vest and be released from the restrictions on
Upon each yearly anniversary from thesettlement date of the agreement. Upon terminationstock awards, shares were withheld to cover the required withholding tax, which was based on the value of a share on the settlement date as determined by the closing price of the certain management’s service withADSs 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 condensed consolidated statements of cash flows. These shares withheld by the Company as a result of the net settlement were accounted for any reason, any shares that are outstandingas treasury stock and not yet vested will be immediately forfeited.considered issued and outstanding.
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.

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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 measured the fair value of the
non-vested
restricted shares as of respective grant dates and recognized the amount asStock-based compensation expense over the deemed service period using a graded vesting attribution model on a straight-line basis.
As of March 31, 2022, there was $68,292 of total unrecognized compensation expense related to
non-vested
restricted shares. The Company recorded compensation expense related to the restricted shares of
$
5,203 and $1,769 for the three months ended March 31, 2022 and 2021, respectively, which were classifiedhas been reported in the accompanying unauditedCompany’s condensed consolidated statements of operations and comprehensive loss as follows:follows (in thousands):
         
   
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 
           
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
$$$$
Selling, general and administrative8,931 5,962 15,923 10,432 
Research and development5,294 4,270 10,712 7,118 
Total14,225 10,232 26,635 17,550 

As of June 30, 2022, there was unrecognized share-based compensation expense of $121.2 million related to unvested share options which the Company expects to recognize over a weighted-average period of 3.58 years.

As of June 30, 2022, there was unrecognized share-based compensation expense of $153.8 million related to unvested restricted shares which the Company expects to recognize over a weighted-average period of 3.91 years.
12. Licenses and collaborative arrangements pursuant to which milestone payments were made
The following is a description of the Company’s significant ongoing collaboration agreements under which the Company has made milestone payments for the three and six months ended March 31,June 30, 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 a par value of $0.000006 per share to argenx 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 arewere subject to certain restrictions. The fair value of the shares on the closing date was determined to be $62,250$62.3 million in the aggregate.
In addition, the Company made a
non-creditable,
non-refundable
development cost-sharing payment of $75,000$75.0 million to argenx during the first quarter in 2021of 2021. In January
14

Zai Lab Limited
Notes to argenx. During the three months ended March 31, unaudited condensed consolidated financial statements
2022, the Company made a milestone payment of $25,000$25.0 million to argenx due to the first regulatory approval by the U.S. Food and Drug Administration (“FDA”) in December 2021 for VYVGART (efgartigimod alfa-fcab). The Company recorded these expensespayments in research and development expenses. Argenx is also eligible to receive tiered royalties (from mid-teen to low-twenties on a percentage basis and subject to certain reductions) based on annual net sales of all licensed product in the
territory.
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Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) 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 sameproduct outside of 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 the terms of the agreement, the Company made an upfront payment of $7,500
$7.5 million to Paratek in 2017, $5,000a $5.0 million milestone payment upon approval by the FDA of a New Drug Application (“NDA”(“NDA”) submission in 2018, $3,000and a $3.0 million milestone payment upon submission of the first regulatory approval application for a licensed product in the People’s Republic ofmainland China in 2020. In February 2022, The Company made another milestone payment of $6,000 during the three months ended March 31, 2022$6.0 million 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 ofmainland China in December 2021.The2021. The Company may be required to pay further commercial milestone payments of up to an aggregate of
$40,500$40.5 million 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.
Collaboration and license agreement with Mirati Therapeutics, Inc. (“Mirati”)

In May 2021, the Company entered into a collaboration and license agreement with Mirati. The Company obtained the right to research, develop, manufacture, and exclusively commercialize adagrasib in Greater China. The Company will support accelerated enrollment in key global, registration-enabling clinical trials of adagrasib in patients with cancer who have a KRASG12C mutation. Mirati has an option to co-commercialize in Greater China and retains full and exclusive rights to adagrasib in all countries outside of Greater China.

Under the terms of the agreement, the Company paid an upfront payment of $65.0 million to Mirati in 2021. During the three months ended June 30, 2022, the Company accrued a development milestone payment of $5.0 million. Mirati is also eligible to receive up to $268.0 million in-development, regulatory, and sales-based milestone payments. Mirati is also eligible to receive tiered royalties (from high-teens to low-twenties on a percentage basis) based on annual net sales of adagrasib in Greater China.

The Company has the right to terminate this agreement at any time by providing written notice of termination to Mirati.
15

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
License agreement with Karuna Therapeutics, Inc. (“Karuna”)
In November 2021, the Company entered into a license agreement with Karuna for the development, manufacturing, and commercialization of KarXT (xanomeline-trospium) in Greater China, including China, Hong Kong, Macau, and Taiwan.
Under the terms of the agreement, the Company paid an upfront payment of $35.0 million to Karuna. During the three months ended June 30, 2022, the Company accrued a development milestone payment of $5.0 million. Karuna is also eligible to receive up to $147.0 million in development and regulatory, and sales-based milestone payments. Karuna is also eligible to receive tiered royalties based on annual net sales of commercialized products in Greater China.
The Company has the right to terminate this agreement by providing written notice of termination to Karuna.
Full details of the licenses and collaborative arrangements are included in the notes to the financial statements in our 2021 Annual Report on Form
10-K
for the year ended December 31, 2021 as filed with the SEC on March 1, 2022.Report. As noted above, the Company has entered into various license and collaboration agreements with third party licensors to develop and commercialize product candidates. Based on the terms of these agreements, 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 from the Company up to an aggregate of approximately
$5,589,801 $5,576.3 million in future contingent development and sales-based milestone payments dependent upon the achievement of contractually specifiedpayments. The development milestones, such as regulatory approval for the product candidates, which may beoccur before the Company has commercialized the product or received any revenue from sales of such product candidate. These milestone payments are subject to uncertainties and contingencies and may not occur.
13. Restricted net assets​​​​​​​assets
The Company’s ability to pay dividends may depend on the Company receiving distributions of funds from its Chinese subsidiaries. Relevant Chinese laws and regulations permit payments of dividends by the Company’s Chinese subsidiaries only out of its retained earnings, if any, as determined in accordance with Chinese accounting standards and regulations. The results of operations reflected in the unaudited condensed consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s Chinese subsidiaries.
subsidiaries.
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Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) 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 and six months ended March 31,June 30, 2022 and 2021, 0no appropriation to statutory reserves was made because the Chinese subsidiaries had substantial losses during such periods.
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 general reserve fund, the Company’s Chinese subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company.
Foreign exchange and other regulation in mainland China may further restrict the Company’s Chinese subsidiaries from transferring funds to the Company in the form of dividends, loans, and advances. As of March 31,June 30, 2022 and December 31, 2021, amounts restricted are the
paid-in
capital of the Company’s Chinese subsidiaries, which both amounted to $406,010.$406.0 million.
16

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
14. Commitments and Contingencies
(a) Purchase commitments
As of March 31,June 30, 2022, the Company’s commitments related to purchase of property and equipment contracted but not yet reflected in the unaudited condensed consolidated financial statement were $22,294$19.5 million which is expected to be incurred within one year.
(b) Contingencies
The Company is a party to, or assignee of, license and collaboration agreements that may require it to make future payments relating to milestone fees and royalties on future sales of licensed products (Note 1
2
)12).
15. Subsequent Event
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date financial statements were issued. The Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements.

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.
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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 2021 Annual Report and our unaudited condensed consolidated financial statements and the accompanying notes included in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q.
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 discovering, developing, and commercializing innovative products that target medical conditions with unmet needs affecting patients in Greater China and worldwide, particularly in the areas of oncology, autoimmune disorders, infectious diseases, and neuroscience.neurological disorders. As of May 5,August 3, 2022 we have four commercialized products that have received marketing approval in one or more territories in Greater China and twelve 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 to 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 – and to successfully 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 commercial milestones as well as tiered royalties based on the net sales of the licensed products. These upfront payments and milestone payments uponare recorded in our research and development expense. During the six months ended June 30, 2022, we accrued $10.4 million of research and development expense related to the achievement of certain development and regulatorydevelopmental milestones are recorded in research and development expense inby our unaudited condensed consolidated financial statements. We did not accrue any such paymentspartners during the three months ended March 31,second quarter of 2022. In addition, we expect to incur substantial costs related to the commercialization of our product candidates, in particular during the early launch phase.
Furthermore, as we pursue our strategy of growth and development, we anticipate that our financial results will fluctuate from quarter to quarter based upon the balance between the successful marketing of our commercial products and our significant research and development expenses. We cannot predict whether or when new products or new indications for marketed products will receive regulatory approval or, if any such approval is received, whether we will be able to successfully commercialize such product(s) and whether or when they may become profitable.
Recent Developments

Recent Product Developments

ZEJULA. In June 2022, we presented a new prespecified subgroup analysis from the Phase 3 PRIME study for ZEJULA in women in mainland China with ovarian cancer at the 2022 American Society of Clinical Oncology (“ASCO”) Annual Meeting. This analysis examined 384 newly diagnosed stage III or IV ovarian cancer patients enrolled in the PRIME study who experienced a complete response (“CR”) or partial response (“PR”) to first-line platinum-based chemotherapy. In the CR group, the median progression-free survival (“mPFS”) was 29.4 months for niraparib vs 8.3 months for placebo (HR=0.45; 95% CI, 0.32–0.61; P<0.001); in the PR group, the mPFS was 19.3 months for niraparib versus 8.3 months for placebo (HR=0.45; 95% CI, 0.23–0.86; P=0.014); and the safety profile of niraparib was consistent with previous clinical trials, with no new safety issues identified in this subgroup analysis.

Optune. In June 2022, the Company and Novocure announced the EF-31 phase 2 pilot study, evaluating the safety and efficacy of TTFields together with standard-of-care (chemotherapy alone or in combination with trastuzumab for HER2-positive patients) as a first-line treatment in patients with gastric cancer, met its primary endpoint of objective response rate (“ORR”) with supportive signals across secondary endpoints. As of June 30, 2022, Optune has been listed in 50 regional customized commercial health insurance plans guided by provincial or municipal governments (or “supplemental insurance plans”).

QINLOCK. As of June 30, 2022, QINLOCK has been listed in 73 supplemental insurance plans since its commercial launch in mainland China in May 2021.

Recent Business Developments18
On

Adagrasib. At the ASCO Annual Meeting in June 2022, our partner Mirati Therapeutics, Inc. (“Mirati”) presented full results from the registration-enabling Phase 2 cohort of the KRYSTAL-1 study evaluating adagrasib in patients with previously treated non-small cell lung cancer (“NSCLC”) harboring a KRASG12C mutation; these results were concurrently published in the New England Journal of Medicine. This presentation included results from a retrospective subgroup analysis from the Phase 2 NSCLC cohort of the KRYSTAL-1 study evaluating adagrasib in patients with KRASG12C-mutated NSCLC and stable, previously treated central nervous system (“CNS”) metastases. The initial clinical results from the Phase 2 registration-enabling study (n=112) showed that the ORR was 43%, the disease control rate (“DCR”) was 80%, the median duration of response (“mDOR”) was 8.5 months (95% confidence interval (“CI”): 6.2 – 13.8), and the mPFS was 6.5 months (95% CI: 4.7 – 8.4). With a January 6,15, 2022 wedata cutoff, the median overall survival (“mOS”) was 12.6 months (95% CI: 9.2 – 19.2). With respect to CNS-specific activity in a subset analysis of stable, previously treated CNS metastases (n=33), results revealed an intracranial (“IC”) ORR of 33% (11/33). Mirati also reported updated findings from a pooled analysis from the KRYSTAL-1 study, including the registrational Phase 2 and Phase 1/1b NSCLC cohorts. The initial results of the pooled analysis of KRYSTAL-1 NSCLC cohorts (n=132) showed that the ORR was 44%, the DCR was 81%, the mDOR was 12.5 months, and the mPFS was 6.9 months. With a January 15, 2022 data cutoff, the mOS was 14.1 months.

In June 2022, Mirati also announced the results of a prospective analysis from the Phase 1b cohort of the KRYSTAL-1 study evaluating IC responses of adagrasib in patients with KRASG12C-mutated advanced NSCLC with active and untreated CNS metastases. The results of the CNS-specific activity in active and untreated CNS metastases (n=19) showed an IC ORR of 32% (6/19).

In addition, the Company treated the first patients in Greater China for the global Phase 3 KRYSTAL-10 study of the combination of adagrasib and cetuximab in patients with KRASG12C-mutated advanced colorectal cancer and for the global Phase 3 KRYSTAL-12 study of adagrasib in patients with KRASG12C-mutated advanced NSCLC in June 2022 and July 2022, respectively.

Bemarituzumab.Our partner Amgen initiated a Phase 1b/2 study (FORTITUDE-301), evaluating the safety and efficacy of bemarituzumab monotherapy in solid tumors with FGFR2b overexpression. In addition, Amgen reported that the final analysis of the FIGHT study, a Phase 2 randomized, double-blind, controlled study evaluating bemarituzumab and modified FOLFOX6 (mFOLFOX6) in patients with previously untreated advanced gastric and gastroesophageal junction cancer was completed, with results continuing to demonstrate that bemarituzumab + mFOLFOX6 improves the clinical outcome of patients with FGFR2b expressing tumors with no new safety concerns and noting that a greater survival benefit was observed with increasing FGFR2b expression levels.

Repotrectinib. In May 2022, our partner Turning Point Therapeutics, Inc. (“Turning Point”) announced that the NMPA accepted the new drug application (NDA) for margetuximab,FDA granted an investigational,
Fc-engineered
monoclonal antibody that targets HER2. The margetuximab NDA is for the treatment of adult patients with metastatic HER2-positive breast cancer who have received two or more prior anti-HER2 regimens, at least one of which was for metastatic disease, in combination with chemotherapy.
On January 12, 2022, we announced treatment of the first patient in Greater China 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 gemcitabineeighth regulatory designation, and
nab-paclitaxel
as front-line treatment for patients with unresectable, locally advanced 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, quality of life, pain-free survival, resectability rate and toxicity.
In February 2022, the Center for Drug Evaluation (CDE) of the NMPA granted third Breakthrough Therapy Designation for(“BTD”), to repotrectinib, for the treatment of patients with ROS1-positive metastatic NSCLC who have not been previously treated with aone ROS1 TKI.TKI and who have not received prior platinum-based chemotherapy. In June 2022, the Center for Drug Evaluation (“CDE”) of the NMPA granted two Breakthrough Therapy Designations for investigational repotrectinib for the treatment of patients with ROS1-positive metastatic NSCLC who have received one prior line of ROS1 TKI and one prior line of platinum-based chemotherapy and for those with ROS1-positive metastatic NSCLC who have received one prior line of ROS1 TKI and no chemotherapy or immunotherapy. The breakthrough therapy designation wasBreakthrough Therapy Designations for repotrectinib were supported by the initial data from both global and Chinese
TKI-naïve
TKI-pretreated ROS1-positive NSCLC patients enrolled in the Phase I/II1/2 TRIDENT-1 study.
TRIDENT-1
study. We plan to participate
CLN-081. In June 2022, our partner Cullinan Oncology presented updated data from the Phase 1/2a study in all cohortsNSCLC patients with EGFR exon 20 insertion mutations at the 2022 ASCO Annual Meeting. Of the 39 patients in the 100 mg BID dose group: 16 (41%) had a confirmed PR; the estimated mDOR was greater than 21 months; mPFS was 12 months; and the safety profile of CLN-081 was amenable for long-term treatment.

BLU-945. In June 2022, we received a Clinical Trial Application (“CTA”) approval from the NMPA for the BLU-945 monotherapy cohort of the global
TRIDENT-1
study. Phase 1/2 SYMPHONY study in Greater China.

17
VYVGART. In June 2022, efgartigimod was introduced to the Hainan Bo’ao Lecheng International Medical Tourism Pilot Zone, and the first Chinese patient was treated with efgartigimod. In July 2022, the NMPA accepted the Biologics License Application for efgartigimod alfa injection for the treatment of adult patients with generalized myasthenia gravis (“gMG”) in mainland China.
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KarXT. In MarchAugust 2022, we presentedour partner Karuna announced positive topline results from theits Phase 3 PRIME studyEMERGENT-2 trial evaluating the efficacy, safety, and tolerability of ZEJULA (niraparib) as maintenance therapy at the Society of Gynecologic Oncology (SGO) 2022 Annual Meeting. ZEJULA demonstratedKarXT in adults with schizophrenia. The trial met its primary endpoint, with KarXT demonstrating a statistically significant and clinically meaningful improvement9.6-point reduction in progression-free survival (PFS)the Positive and Negative Syndrome Scale (“PANSS”) total score compared to placebo (-21.2 KarXT vs. -11.6 placebo, p<0.0001) at Week
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5 (Cohen’s d effect size of 0.61). KarXT also demonstrated an early and sustained statistically significant reduction of symptoms, as assessed by PANSS total score, starting at Week 2 and maintained such reduction through all timepoints in the trial. The trial also met its key secondary endpoints, demonstrating statistically significant reductions in positive and negative symptoms of schizophrenia, as measured by the PANSS positive, PANSS negative, and PANSS Marder negative subscales. KarXT was generally well tolerated, with a tolerable safetyside effect profile substantially consistent with prior trials of KarXT in Chinese patients with newly diagnosed advanced epithelial ovarian, fallopian tube, or primary peritoneal cancer (collectively termed as ovarian cancer) followingschizophrenia.

Simurosertib (CDC7 Inhibitor). Based on an extensive review of the data collected from previously completed studies, we have decided to terminate enrollment for the study of simurosertib.

ZL-1201 (CD47 Inhibitor). In July 2022, Zai Lab determined a responserecommended Phase 2 dose in the ongoing Phase 1 trial. Based on a review of the competitive landscape, Zai Lab has decided to platinum-based chemotherapy, regardlessdeprioritize ZL-1201 for internal development but will pursue out-licensing opportunities.

Recent Business Developments

In May 2022, we completed our engagement of biomarker status. InKPMG to be our independent registered public accounting firm for 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.
fiscal year ending December 31, 2022. On May 25, 2022, the Company received the requisite approvals from the Hong Kong Stock Exchange and the Financial Reporting Council of Hong Kong, and on May 31, 2022, the Company and KPMG signed an engagement letter, and the appointment became effective on the same date.

We also continuedcompleted our voluntary conversion from secondary listing status to strengthenprimary listing on the Hong Kong Stock Exchange, effective June 27, 2022. The Company’s ordinary shares and expandADSs will continue to be traded on the Hong Kong Stock Exchange and Nasdaq, respectively, and remain mutually fungible. Because of our leadership team. On March 15,conversion to primary listing in Hong Kong, we are 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. Our ordinary shares have been included in the Shenzhen-Hong Kong Stock Connect and Shanghai-Hong Kong Stock Connect programs since June 2022 we announcedand July 2022, respectively.

In July 2022, the Board further enhanced our corporate governance by appointing John Diekman to be lead independent director. The Board continues to believe that the Chief Executive Officer is best suited to serve as Chairperson of the Board at this time, including due to her extensive understanding of our business and industry and her ability to identify strategic opportunities, promote the effective execution of strategic initiatives, and facilitate the flow of information between management and the Board. While the roles of Chairperson of the Board and Chief Executive officer are combined, our lead independent director will, among other things, lead meetings of the Board when the Chairperson is not present, serve as liaison between the Chairperson and independent directors, have the authority to call meetings of the independent directors, and, if requested by major shareholders, be available for consultation and direct communication. As a result of Mr. Diekman’s appointment as lead independent director, he stepped down as Chair of Joshuathe Audit Committee, although he will continue to serve as a member of the Audit Committee. As a result, the Board appointed Scott Morrison to be Chair of the Audit Committee.

Josh Smiley, aged 53, joined the Company as our Chief Operating Officer, effective on August 1, 2022. Mr. Smiley brings over 26 years 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 becameHe will report directly to our Chief BusinessExecutive Officer taking on increased responsibilities after the departure of Tao Fu, our former Chief Strategy Officer.
In March 2022, our shareholders approvedand will be 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 numberkey member 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 Subdivisionexecutive committee. He 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 ratiooversee all aspects 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 Subdivisionbusiness, finance, and ADS Ratio Change did not result in any change to the number of outstanding ADSs of the Company.global operations.
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 auditor 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.
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 ArchivesAmendment to the Implementation Regulation of the PRC Drug Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments)
Law

On April 2,May 9, 2022, the CSRCNMPA published a comprehensive draft of Amendment to the revised Provisions on Strengthening Confidentiality and ArchivesImplementation Regulation of the PRC Drug Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments)Law (the “Draft Archives Rules”DAL Implementing Regulations”) for public comments. The Draft Amendment introduced changes to the regulatory framework and aimed to codify certain regulatory initiatives implemented by the Chinese government since the promulgation of the current PRC Drug Administration Law in 2019 (the “DAL”).

The Draft Archives Rules require that, in relationDAL Implementing Regulations propose to extend the reach of DAL to offshore development and manufacturing activities of pharmaceutical companies to the extent that the pharmaceutical companies would like to obtain marketing authorizations for their drug products in mainland China. All overseas securities offeringR&D activities and listingproduction activities of Chinese domestic enterprises, such domestic enterprises, as well as securities companies and securities service institutions providing relevant securities services, are requiredconcerning a drug to strictly complybe marketed in mainland China and/or already marketed in mainland China should be carried out in
20

compliance with the relevantregulatory requirements on confidentialityspecified in applicable Chinese laws, regulations, rules, standards, and archives management, establishspecifications.

Patent linkage and regulatory data protection have been included in the Draft DAL Implementing Regulations. The Draft DAL Implementing Regulations propose to grant market exclusivity with a sound confidentiality and archives system and take necessary measuresspecified period to implement their confidentiality and archives management responsibilities.
Accordingfirst-to-market generic drug contributing to the Draft Archives Rules, if duringinvalidity of relevant drug patent.

PRC Anti-Monopoly Law

On June 24, 2022, 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 LawStanding Committee of the National 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 conditions 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 recentCongress published amendments to the China Civil ProcedurePRC Anti-Monopoly Law on December 24, 2021,(the “AML”), which came into effect on August 1, 2022. The amended AML formally implements China’s latest anti-monopoly policies by, among other things, improving regulatory rules for anti-competitive agreements, expressly addressing monopoly issues in the platform economy, and substantially increasing the penalties for violating the law.

The improvements of the regulatory rules for anti-competitive agreements made by the amended AML mainly includes: (i) expressly stipulating that an agreement which fixes or limits resale prices, that is, a vertical anti-competitive agreement, is not prohibited if relevant business operators can prove that such agreement does not have the effect of eliminating or restricting competition; (ii) formally provides the “safe harbor” regime which stipulates that a vertical anti-competitive agreement is not prohibited, if the parties’ market share in the relevant market is lower than the market share percentage set by the anti-monopoly enforcement agency and other conditions established by the anti-monopoly enforcement agency are met; (iii) codifies that business operators shall not organize other business operators to reach a monopoly agreement or provide substantial assistance for other business operators to reach a monopoly agreement.

The amended AML formally extends the anti-monopoly regulatory regime to the platform economy by outlining the general principal that business operators shall not engage in monopolistic activities, such as by taking advantage of data and algorithms, technology, capital advantage, and platform rules. The amended AML also specifically prohibits business operators from abusing market dominance, such as by using data and algorithms, technology, and platform rules.

Penalties for violation of the AML have been substantially increased by the amended AML. For example, according to the amended AML, if a company completes a concentration of business in violation of the AML that will have or is likely to have the effect of eliminating or restricting competition, in addition to other remedial measures, a fine of up to 10% of the last year’s sales revenue may be imposed. If the concentration of business in violation of the AML completed by the company does not have the effect of eliminating or restricting competition, a fine of up to RMB 5 million may be imposed. In the case that the aforementioned violation has particularly serious circumstances, bad impact, or consequences, the fine imposed may be further increased to between two and five times the aforementioned fine amount.

Cross-Border Data Transfers

Measures on Security Assessment of Cross-Border Data Transfer

On July 7, 2022, the Cyberspace Administration of China (“CAC”) issued Measures on Security Assessment of Cross-Border Data Transfer (the “Security Assessment Measures”), which sets out a security assessment framework for cross-border data transfers out of mainland China as well as ground rules for a security assessment filing for cross-border data transfers which was stipulated in the Cybersecurity Law (“CSL”) and the Personal Information Protection Law (“PIPL”).

A security assessment will be triggered if a cross-border data transfer out of mainland China falls into any of the following scenarios: (i) transfer of important data by data processors; (ii) transfer of personal information (“PI”) by critical information infrastructure operators (“CIIOs”) and data processors that process PI of more than one million individuals; (iii) transfer of PI by data processors that have transferred either PI of over 100,000 individuals or sensitive PI of over 10,000 individuals abroad since January 1 of the preceding year; and (iv) other situations as determined by the CAC. According to statements by the CAC, a cross-border data transfer includes (i) an outbound transfer and overseas storage of data collected and generated during a data processor’s operation in mainland China; and (ii) a remote access or use of data collected and generated by a data processor stored within mainland China by overseas institutions, organizations, and individuals.

Prior to applying for a security assessment with the CAC, data processors are required to carry out a self-risk assessment, which needs to be presented to the CAC along with an application filing and other required materials for a security assessment. During a security assessment, the CAC will primarily focus on risks to national security, public interests, and the legitimate rights and interests of individuals or organizations that such cross-border data transfer may
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cause. A cross-border data transfer of relevant data will not be allowed if the CAC does not approve the security assessment filing. Once the CAC approves the security assessment filing, such approval will remain valid for two years and may be renewed. An application for security assessment needs to be re-submitted if there is a change in the cross-border data transfer that may affect the security of the exported data, such as changes in the purpose, method, scope, and type of the exported data and changes in the purpose and method of the processing of the exported data by overseas recipients.

The Security Assessment Measures have retroactive effect for cross-border data transfers out of mainland China of relevant data conducted prior to their effective date on September 1, 2022. If a Data Processor fails to complete its security assessment for any of its cross-border data transfers of relevant data out of mainland China prior to the effective date of the Security Assessment Measures, it needs to rectify the failure within six months after the effective date of the Security Assessment Measures.

Specification for Certification of Personal Information Cross-Border Processing Activities

On June 24, 2022, the National Information Security Standardization Technical Committee issued Guidance on Network Security Standardized Practice – Specification for Certification of Personal Information Cross-Border Processing Activities (the “Certification Specification”), which serves as an industry standard. The Certification Specification provides that PI processors may apply for a personal information protection certification (a “PIPC”) from certain qualified institutions, pursuant to which PI processors, provided that the requirements stipulated by PIPL are met, may rely on a PIPC to comply with cross-border PI transfer requirements when engaging in (i) intra-group cross-border transfers within a multinational company or subsidiaries or affiliated companies of an economic / business entity, or (ii) data processing activities conducted outside of mainland China involving PI of individuals located in mainland China subject to the extra-territorial jurisdiction of the PIPL.

The PI processors involved in PI cross-border activities shall carry out a prior self-risk assessment focusing on whether the cross-border PI transfer is legitimate, justifiable, and necessary and the security protection measures taken are effective and appropriate to the degree of risks. A self-risk assessment must include the following improvements tofactors: (i) whether the civil procedure under China’s current judicial system: (i)cross-border PI transfer complies with applicable laws and administrative regulations; (ii) the consentimpact on the rights and interests of PI subjects, particularly the impact of the parties, civil litigation activities may be conducted online through the informationlegal environment and 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 scopesecurity environment of the litigation documentsforeign countries and regions; and (iii) other matters necessary to safeguard the rights and interests in relation to PI.

The list of qualified institutions for PIPC has not been released to date, and therefore, it is not yet possible for companies to rely on a PIPC to legitimize their cross-border data transfers.

Standard Contract for Cross-Border PI Transfer and Accompanying Regulations

On June 30, 2022, the CAC issued for public consultation draft Regulations on the Standard Contract for Cross-Border Transfer of Personal Information, which are allowedintroduced a draft standard contract for the cross-border transfer of PI outside of mainland China (the “PRC SC”). The PRC SC clarifies terms and conditions to be served by electronic means expands to include judgments, awardsagreed on between PI processors as a data exporter and mediation statements; (iv) the period of service which is effected by public announcement in cases where the location of thean overseas 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)as a data importer with respect to small claims procedure,cross-border data transfers of PI out of mainland China. When finalized, the amountPRC SC can be used to comply with requirements under the PIPL for cross-border data transfers of PI out of mainland China that do not need to undergo a security assessment.

When finalized, a PI processor may enter into the PRC SC and provide it along with other required materials to relevant governmental authorities for filing to ensure the legality of a cross-border transfer out of mainland China if the following conditions are satisfied: the PI processor (i) is not a CIIO; (ii) processes PI of fewer than 1 million individuals; (iii) has provided PI of fewer than 100,000 individuals overseas in aggregate since January 1 of the subject matter applicable to small claims procedure is raised,preceding year; and (iv) has provided sensitive PI of fewer than 10,000 individuals overseas in aggregate since January 1 of the trial time for small claims procedure is limited to three months andpreceding year.

The PRC SC imposes 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 andobligations on the parties of such cross-border PI transfers to a mediation agreementprotect the interests of PI subjects, including, for example, (i) data exporters are given more optionsrequired to use reasonable efforts to ensure data importers have adequate technical and organizational measures to ensure secure processing and have relevant capabilities to fulfill their obligations relating to the data transfer, and (ii) the parties of such cross-border transfer are required to ensure that the rights and interests of data subjects are well recognized in termspractice (and data subjects’ inquiries are promptly responded to), as such data subjects are considered third-party beneficiaries of choosing the people’s court for judicial conformation.
PRC SC.
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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 (Draft 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 Human Genetic Resources became effective. Under the Draft Implementing Rules, clinical studies conducted for purpose of obtaining marketing authorization for drugs and medical devices in China, if not involving the export of HGR materials, will be eligible for a notification filing (as opposed 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. 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 Regulations on Supervision and Administration of Medical Devices
On March 18, 2021, the State Council published new Regulations on Supervision and Administration of Medical Devices, or Order 739, which became effective on June 1, 2021. This
top-level
medical device administrative regulation contains a number of important changes, the practical effects of which will be implemented in corresponding auxiliary regulations 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.
Measures for the Supervision and Administration of the Production of Medical Devices
On May 1, 2022, a revised version of the Measures for the Supervision and Administration of the Production of Medical Devices, or Order 53, promulgated 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
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.
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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 our 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. As a result of this commitment, our pipeline of product candidates has been steadily advancing and expanding, with twelve late-stage clinical product candidates being investigated as of March 31,June 30, 2022.
We have financed our activities primarily through private placements, our initial public offering on Nasdaq in September 2017, multiple
follow-on
offerings, and a secondary listing on the Hong Kong Stock Exchange in September 2020. Through March 31,June 30, 2022, 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. Our operations have consumed substantial amounts of cash since inception. The net cash used in our operating activities was $87.1$132.0 million and $169.5$235.3 million for the threesix months ended March 31,June 30, 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 twelve 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), contract manufacture organizations (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;
•expenses associated with the construction and maintenance of our manufacturing facilities; and
•costs associated with operating as a public company.
The Company is in the process of evaluating its development programs and is developing a series of recommendations for prioritizing these programs to concentrate our resources on programs that have the greatest potential to beneficially impact patients, strengthen our global competitiveness, and provide long-term sustainability.
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 commercialize, develop, and manufacture our products and assets. These increases will likely include increased headcount, increased share-based compensation charges, increased product distribution and promotion costs, expanded infrastructure, and increased costs for insurance. We also anticipate to incurincurring additional legal, compliance, accounting, and investor and public relations expenses associated with being a public company.
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Our Ability to Commercialize Our Product Candidates
As of March 31,June 30, 2022, twelve 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 never occur. Certain of our product candidates may require additional
pre-clinical
and/or clinical
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development, regulatory approvals in multiple jurisdictions, manufacturing supply, substantial investment and significant marketing efforts before we generate any revenue from product sales.
Our License Arrangements
Our results of operations have been, and we expect them to continue to be, affected by our licensing, 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 commercial milestones for the relevant products under these agreements as well as tiered royalties based on the net sales of the licensed products. These accruals for upfront payments and milestone payments upon the achievement of certain development and regulatory milestones are recorded in research and development expense in our unaudited condensed consolidated financial statements and totaled nil and $171.3were $10.4 million for the three and six months ended March 31,June 30, 2022 and March 31,$98.0 million and $269.2 million for the three and six months ended June 30, 2021, respectively.
Results of Operations

Three Months Ended March 31,The following table summarizes our results of operations for the three and six months ended June 30, 2022 Compared to Three Months Ended March 31,and 2021
(in thousands, except percentages):

Three Months Ended June 30,ChangeSix Months Ended
June 30,		Change
20222021$%20222021$%
Revenues:
Product revenue, net47,575 36,935 10,640 29 %93,670 57,038 36,632 64 %
Collaboration revenue601 — 601 100 %1,230 — 1,230 100 %
Total revenues48,176 36,935 11,241 30 %94,900 57,038 37,862 66 %
Expenses:
Cost of sales(17,407)(10,868)(6,539)60 %(33,051)(18,373)(14,678)80 %
Research and development(66,084)(142,224)76,140 (54)%(119,938)(346,076)226,138 (65)%
Selling, general, and administrative(63,401)(54,414)(8,987)17 %(120,392)(90,252)(30,140)33 %
Loss from operations(98,716)(170,571)71,855 (42)%(178,481)(397,663)219,182 (55)%
Interest income1,175 244 931 382 %1,363 458 905 198 %
Other income (expenses), net(40,392)7,406 (47,798)(645)%(42,988)1,179 (44,167)(3746)%
Loss before income tax and share of loss from equity method investment(137,933)(162,921)24,988 (15)%(220,106)(396,026)175,920 (44)%
Income tax expense— — — — %— — — — %
Share of loss from equity method investment— (403)403 (100)%(221)(208)(13)6 %
Net loss(137,933)(163,324)25,391 (16)%(220,327)(396,234)175,907 (44)%
Net loss attributable to ordinary shareholders(137,933)(163,324)25,391 (16)%(220,327)(396,234)175,907 (44)%

Revenues
Total revenues consist of the following:
   
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. 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.

The amount of revenueCompany lowered the selling price of ZEJULA due to its inclusion in the NRDL in December 2020 and December 2021 for certain therapies. Accordingly, the Company accrued $0.3 million and $2.9 million of sales rebates as compensation to distributors for those products previously sold at the price prior to the NRDL implementation during the three and six months ended June 30, 2022, respectively, and nil and $22.0 million during the three and six months ended June 30, 2021, respectively.

QINLOCK and NUZYRA are also scheduled to enter negotiations with the National Healthcare Security Administration regarding potential inclusion in the NRDL, and in June 2022, the Company lowered the selling price for
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these products. Accordingly, the Company accrued $2.7 million and $0.2 million for sales rebates as compensation to distributors previously sold at the price prior to the reduction during the three months ended June 30, 2022 for QINLOCK and NUZYRA, respectively.

In addition, between March 31, 2022 and March 31, 2021, respectively, was adjusted by the normal processMay 2022, a number of government restrictions or lockdown measures were imposed in mainlandGreater China to compensate distributors for products recently sold at prices priorhelp control the spread of COVID-19, including in some large cities like Shanghai. These government restrictions or lockdown measures caused some patients to have limited or no access to ZEJULA, Optune, QINLOCK, or NUZYRA, which had a negative impact on our revenue. Although the revenue impact was modest in the second quarter of 2022, we expect some residual revenue impacts in the second half of 2022. For more information on risks related to the NRDL implementation. COVID-19 pandemic, see “Item 1A. Risk Factors.”

The following table disaggregatespresents net revenue by product for the three and six months ended March 31,June 30, 2022 and 2021, respectively:2021(in thousands, except percentages):


(in thousands)
  
Three months ended March 31,
 
2022
   
%
   
2021
   
%
 
Three Months Ended June 30,ChangeSix Months Ended June 30,Change
20222021$%20222021$%
ZEJULA
  $29,597    64.2   $12,606    62.7 ZEJULA34,052 23,366 10,686 46 %63,649 35,972 27,677 77 %
Optune
   12,797    27.8    7,130    35.5 Optune11,592 9,535 2,057 22 %24,389 16,665 7,724 46 %
QINLOCK
   2,959    6.4    367    1.8 QINLOCK623 4,034 (3,411)(85)%3,582 4,401 (819)(19)%
NUZYRA
   742    1.6    —      —   NUZYRA1,308 — 1,308 — %2,050 — 2,050 — %
  
 
   
 
   
 
   
 
 
Total product revenue, net
  $46,095    100.0   $20,103    100.0 Total product revenue, net47,575 36,935 10,640 29 %93,670 57,038 36,632 64 %
  
 
   
 
   
 
   
 
 
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Collaboration revenue
Collaboration revenue increased by $0.6 million to $0.6 million for the three months ended March 31,June 30, 2022 from nil for the three months ended March 31, 2021June 30, 2021. Collaboration revenue increased by $1.2 million for the six months ended June 30, 2022 from nil for the six months ended June 30, 2021. These increases were due to our collaborative arrangement with Huizheng (Shanghai) Pharmaceutical Technology Co., Ltd.
Cost of Sales
Cost of sales increased by $8.1$6.5 million to $15.6$17.4 million for the three months ended March 31,June 30, 2022 from $7.5$10.9 million for the three months ended March 31,June 30, 2021, and increased by $14.7 million to $33.1 million for the six months ended June 30, 2022 from $18.4 million for the six months ended June 30, 2021. These increases were primarily due to increasing sales volume, higher product costs, and higher royalties during the three months ended March 31, 2022.royalties.
Research and Development Expenses
The following table sets forth the components of our research and development expenses for the respective period indicated.
three and six months ended June 30, 2022 and 2021 (in thousands, except percentages):
(in thousands)
  
Three months ended March 31,
 
2022
   
%
   
2021
   
%
 
Three Months Ended June 30,ChangeSix Months Ended
June 30,		Change
20222021$%20222021$%
Research and development expenses:
        Research and development expenses:
Personnel compensation and related costs
  $24,802    46.1   $12,697    6.2 Personnel compensation and related costs$27,045 $17,282 $9,763 56 %$51,847 $29,979 $21,868 73 %
Licensing fees
   —      —      171,282    84.0 Licensing fees10,436 97,966 (87,530)(89)%10,436 269,248 (258,812)(96)%
CROs/CMOs/Investigators expenses
   23,550    43.7    15,526    7.6 CROs/CMOs/Investigators expenses23,368 19,618 3,750 19 %46,918 35,144 11,774 34 %
Other costs
   5,502    10.2    4,347    2.2 Other costs5,235 7,358 (2,123)(29)%10,737 11,705 (968)(8)%
  
 
   
 
   
 
   
 
 
Total
  $53,854    100.0   $203,852    100.0 Total$66,084 $142,224 $(76,140)(54)%$119,938 $346,076 $(226,138)(65)%
  
 
   
 
   
 
   
 
 
Research and development expenses decreased by $150.0$76.1 million to $53.9$66.1 million for the three months ended March 31,June 30, 2022 from $203.9$142.2 million for the three months ended March 31,June 30, 2021 primarily due to:

•a decrease of $171.3$87.5 million in licensing fees in connection with theas we recorded no upfront and milestone fee paidpayments for licensing agreement due to no new licensing for the three months ended March 31, 2022;agreements; partially offset by
•an increase of $12.1$9.8 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 restricted shares to certain employees, and
those awards during the three months ended June 30, 2022;
•an increase of $8.0$3.8 million in CROs/CMOs/Investigators expenses related to ongoing and newly initiated clinical trials in the three months ended March 31,June 30, 2022.
Research and development expenses decreased by $226.1 million to $119.9 million for the six months ended June 30, 2022 from $346.1 million for the six months ended June 30, 2021 primarily due to:
•a decrease of $258.8 million in licensing fees as we advanced our drug candidate pipeline.recorded no upfront payments for licensing agreements; partially offset by
•an increase of $21.9 million in personnel compensation and related costs primarily attributable to increased employee compensation costs due to headcount growth and the grants of new share options and restricted shares and the continued vesting of those awards during the six months ended June 30, 2022;
•an increase of $11.8 million in CROs/CMOs/Investigators expenses related to ongoing and newly initiated clinical trials in the six months ended June 30, 2022.
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The following table summarizes our research and development expenses by program for the three and six months ended March 31,June 30, 2022 and 2021 respectively:
(in thousands, except percentages):
Three Months Ended June 30,ChangeSix Months Ended
June 30,		Change
20222021$%20222021$%
Research and development expenses:
Clinical programs$33,292 $93,433 $(60,141)(64)%$56,144 $279,689 $(223,545)(80)%
Pre-clinical programs1,657 28,545 (26,888)(94)%4,222 31,045 (26,823)(86)%
Unallocated research and development expenses30,835 20,246 10,589 52 %59,272 35,342 23,930 68 %
Total$65,784 $142,224 $(76,440)(54)%$119,638 $346,076 $(226,438)(65)%
(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 
   
 
 
   
 
 
   
 
 
   
 
 
 
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Research and development expenses attributable to clinical programs decreased by $163.4$60.1 million to $33.3 million for the three months ended June 30, 2022 from $186.3$93.4 million during the three months ended March 31, 2021 (which includedJune 30, 2021. Research and development expenses attributable to pre-clinical programs decreased by $26.9 million to $1.7 million for the licensing fees of $171.3 million) to $22.9three months ended June 30, 2022 from $28.5 million during the three months ended March 31, 2022. June 30, 2021. Those decreases were driven by decreased license fees.
Research and development expenses attributable to
pre-clinical
clinical programs remained relatively consistentdecreased by $223.5 million to $56.1 million for the six months ended June 30, 2022 from $279.7 million during the threesix months ended March 31, 2022 comparedJune 30, 2021. Research and development expenses attributable to pre-clinical programs decreased by $26.8 million to $4.2 million for the threesix months ended March 31,June 30, 2022 from $31.0 million during the six months ended June 30, 2021. Those decreases were driven by decreased license fees.
Although we manage our external research and development expenses by program, we do not allocate our internal research and development expenses by program because our employees and internal resources may be engaged in projects for multiple programs at any given time.
Selling, General, and Administrative Expenses
The following table sets forth the components ofsummarizes our selling, general and administrative expenses by program for the respective period indicated.
three and six months ended June 30, 2022 and 2021 (in thousands, except percentages):
Three Months Ended June 30,ChangeSix Months Ended
June 30,		Change
20222021$%20222021$%
Selling, General and Administrative Expenses:
Personnel compensation and related costs$41,320 $30,060 $11,260 37 %$79,523 $53,472 $26,051 49 %
Professional service fees8,072 4,806 3,266 68 %15,505 8,389 7,116 85 %
Other costs14,009 19,548 (5,539)(28)%25,364 28,391 (3,027)(11)%
Total$63,401 $54,414 $8,987 17 %$120,392 $90,252 $30,140 33 %
(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$9.0 million to $57.0$63.4 million for the three months ended March 31,June 30, 2022 from $35.8$54.4 million for the three months ended March 31,June 30, 2021 primarily due to:
•an increase of $14.8$11.3 million in personnel compensation and related costs which was primarily attributable to increased commercial and administrative personnel costs due to headcount growth and grants of new share options and restricted shares and the continued vesting of those awards during the three months ended March 31, 2022 and the grants and vesting of share options and restricted shares to certain employees;
June 30, 2022;
•an increase of $3.9$3.3 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; and
those increases were partially offset by
an increase•a decrease of $2.5$5.5 million in other costs mainly includingrelated to selling, rental, and administrative expenses for commercial operations in mainland China, Hong Kong, and Taiwan.
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Selling, general, and administrative expenses increased by $30.1 million to $120.4 million for the six months ended June 30, 2022 from $90.3 million for the six months ended June 30, 2021 primarily due to:
•an increase of $26.1 million in personnel compensation and related costs which was primarily attributable to increased commercial and administrative personnel costs due to headcount growth and grants of new share options and restricted shares and the continued vesting of those awards during the six months ended June 30, 2022;
•an increase of $7.1 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; those increases were partially offset by
•a decrease of $3.0 million in other costs mainly related to selling, rental, and administrative expenses primarily attributable tofor the commercial operation in mainland China, Hong Kong, and Taiwan.
Interest Income
Interest income were $0.2was $1.2 million and $0.2 million for the three months ended March 31,June 30, 2022 and 2021, respectively, and $1.4 million and $0.5 million for the six months ended June 30, 2022 and 2021, respectively.
Other Expenses,Income (Expenses), Net
Other expensesincome (expenses), net decreased by $3.6$47.8 million to $2.6$40.4 million of net expense for the three months ended March 31,June 30, 2022 from $6.2$7.4 million of net income for the three months ended March 31,June 30, 2021 primarily as a result of an increase in foreign exchange gainloss of $42.2 million and governmental subsidies net ofan equity investment loss in MacroGenics.
MacroGenics of $5.6 million.
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Other income (expenses), net decreased by $44.2 million to $43.0 million of net expense for the six months ended June 30, 2022 from $1.2 million of net income for the six months ended June 30, 2021 primarily as a result of an increase in foreign exchange loss of $33.5 million and an equity investment loss in MacroGenics of $12.6 million, partially offset by an increase in governmental subsidies of $1.5 million.
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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.
Revenue recognition
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. Estimated 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.
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Sensitivity of Estimate to Change
Actual amounts of rebates ultimately paid or billed may differ from our estimates. We will reassess estimates for rebates periodically. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become 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 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.
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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 vesting 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 expenses relating to those awards are reversed.
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 somethe stock prices of certain comparable companies’ stock pricescompanies over the most recent historical periods equivalent to the options’ expected lives. Expected lives are principally based on our historical exercise experience with previous option grants. The expected dividend yield is zero as we have never paid dividends and do not currently anticipate paying any in the foreseeable future.
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Sensitivity of Estimate to Change

The assumptions used in this method to determine the fair value of our ordinary 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. 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, 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,June 30, 2022 and 2021, we did not have any significant unrecognized uncertain tax positions.
B. Liquidity and Capital Resources
We have financed our activities primarily through private placements, our September 2017 initial public offering on the Nasdaq, stock exchange, various
follow-on
offerings and our September 2020 secondary listing on the Hong Kong Stock Exchange of our ordinary shares and/or ADSs. Through March 31,June 30, 2022, 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, secondary listing and subsequent
follow-on
offerings.
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Our operations have consumed substantial amounts of cash since inception. The net cash used in our operating activities was $87.1$132.0 million and $169.5$235.3 million for the threesix months ended March 31,June 30, 2022 and 2021, respectively. We have commitments for capital expenditure of $22.3$19.5 million as of March 31,June 30, 2022, mainly for the purpose of plant construction and installation. We currently are not aware of any events that are reasonably likely to cause a material change in the relationship between our costs and revenues.
As of March 31,June 30, 2022, we had cash, cash equivalents, restricted cash and short-term investment of $1,313.0$1,256.9 million. Our expenditures are principally focused on research and development and are largely discretionary. As such, we believe that our current losses and cash used in operations do not present going concern issues. Based on our current operating plan, we expect that our cash, cash equivalents, restricted cash and short-term investments will enable us to fund our operating expenses and capital expenditures requirements for at least the next 12 months. However, in order to bring to
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fruition our research and development objectives, we will ultimately need additional funding sources and there can be no assurances that they will be made available.
The following table provides information regarding our cash flows for the threesix months ended March 31,June 30, 2022 and 2021:
2021 (in thousands):
Six Months Ended
June 30,		Change
20222021$
Net cash used in operating activities$(132,027)$(235,348)$103,321 
Net cash (used in) provided by investing activities(143,869)737,828 (881,697)
Net cash (used in) provided by financing activities(2,240)820,949 (823,189)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash(5,144)1,028 (6,172)
Net (decrease) increase in cash, cash equivalents and restricted cash$(283,280)$1,324,457 $(1,607,737)
   
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 
  
 
 
   
 
 
 
Net cash used in operating activities
During the threesix months ended March 31,June 30, 2022, our operating activities used $87.1$132.0 million of cash, which resulted principally from our net loss of $82.4$220.3 million, adjusted for
non-cash
charges of $23.0$45.9 million, and cash used in our operating assets and liabilities of $27.7$42.4 million.
During the threesix months ended March 31,June 30, 2021, our operating activities used $169.5$235.3 million of cash, which resulted principally from our net loss of $232.9$396.2 million, adjusted
for non-cash charges
of $72.1$85.9 million, and cash usedprovided in our operating assets and liabilities of $8.7$75.0 million. The decrease in cash used in operating activities was primarily due to the decrease of license payments.
Net cash (used in) provided by investing activities

Net cash used in investing activities was $30.1$143.9 million for the threesix months ended March 31,June 30, 2022 compared to net cash provided by investing activities of $742.0$737.8 million for the threesix months ended March 31,June 30, 2021. The decrease inshift from cash provided by to cash used in investing activities was primarily due to thea decrease of $613.9 million in proceeds from the maturity of short-term investments, an increase of $260.3 million in purchases of short-term investments, and an increase of $7.8 million from purchases of property and equipment during the threesix months ended March 31,June 30, 2022 compared to the threesix months ended March 31, 2021.June 30, 2021
Net cash (used in) provided by (used in) financing activities

Net cash used by financing activities was $2.2 million for the six months ended June 30, 2022 compared to net cash provided by financing activities was $0.3of $820.9 million for the threesix months ended March 31, 2022 comparedJune 30, 2021. The shift from cash provided by to net cash used in financing activities was primarily because we had proceeds of $0.3$818.9 million forfrom our issuance of ordinary shares upon public offerings during the threesix months ended March 31, 2021. The increase in cash provided by financing activities was primarily due to the reduced payment of public offering costsJune 30, 2021 while there were no such transactions during the threesix months ended March 31,June 30, 2022.
C. Research and Development Activities and Expenditures, Including Patents and Licenses
Full details of our research and development activities and expenditures are provided in the “Research and Development Expenses” and “Results of Operations” sections above.
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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 “Item 8. Financial Statements and Supplementary Data-Recent accounting pronouncements” in our 2021 Annual Report.
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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 liquidity risk.
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 371.8425.2 million and RMB 151.7RMB151.7 million, which were denominated in RMB, representing 7%9% and 2% of the cash and cash equivalents, as of March 31,June 30, 2022 and December 31, 2021, 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 will be affected by the exchange rate between the U.S. dollar and the RMB because the value of our business is effectively denominated in RMB, while ADSs will be traded in U.S. dollars.
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 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.

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The carrying amounts of cash and cash equivalents and short-term investments represent the maximum amount of loss due to credit risk. We had cash and cash equivalents of $847.0$680.8 million and $964.1 million and short-term investments of $465.3$575.3 million and $445.0 million as of March 31,June 30, 2022 and December 31, 2021, respectively. As of March 31,June 30, 2022 and December 31, 2021, 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 we continually monitor the credit worthiness of these financial institutions.
Accounts receivable are typically unsecured and are derived from product sales and collaborative arrangement. We manage credit risk of accounts receivable through ongoing monitoring of the outstanding balances and limit the amount of credit extended based upon payment history and the debtor’s current credit worthiness. Historically, we have collected the receivables from customers within the credit terms with no significant credit losses incurred. As of March 31,June 30, 2022, our two largest debtors accounted for approximately 39%35% of our total accounts receivable collectively.
Certain accounts receivable balances are settled in the form of notes receivable. As of March 31,June 30, 2022, 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
In recent years, mainland China has not experienced significant inflation and thus 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.
Item 4. Controls and Procedures
Management’s Evaluation of our Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit 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) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
As of March 31,June 30, 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 controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive officer and principal financial officer have concluded based upon the evaluation described above that, as of March 31,June 30, 2022, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
During the three months ended March 31,June 30, 2022, there have not been any changes in our internal controls over financial reporting (as such item is defined in Rules
13a-15(f)
and
15d-15(f)
promulgated under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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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
should be read in conjunction with our 2021 Annual Report and Q1 2022 Form 10-Q, which describesdescribe 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 and Q1 2022 Form 10-Q 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 and our Q1 2022 Form 10-Q are set forth below:

BecauseWe face risks related to the majorityongoing effects of the COVID-19 pandemic, including government actions and quarantine measures taken in response, particularly in mainland China where our operations are primarily located. For example, the COVID-19 pandemic has adversely affected our sales, marketing, development activities of our proprietary products and our licensor’s products, and our clinical trial operations, and it may continue to adversely affect our business and results of operations, perhaps significantly, depending on the nature, severity, and duration of the continuing effects of the pandemic.

Since December 2019, global health concerns relating to the COVID-19 pandemic have been weighing on the macroeconomic environment and have significantly increased economic volatility and uncertainty. Government authorities worldwide, including in mainland China, have implemented numerous measures to try to contain the spread of the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns. Our business operations and those of our auditor hassuppliers, CROs, CMOs, and other contractors and third parties on which we rely – as well as the Chinese economy more broadly – have been, and may continue to be, adversely affected by the effects of the pandemic and such government measures taken in response.

In the first quarter of 2022, there were a number of COVID-19 cases in Greater China, especially in some large cities like Shanghai, where one of our principal executive offices is located, that experienced a wave of intermittent government shutdowns in connection with COVID-19 control measures, especially between March and May 2022 when COVID-19 lockdown restrictions increased and most of the city was subject to a full lockdown. Other cities or regions in Greater China are, have been, or may be subject to similar government restrictions or lockdowns as a result of continued uncertainties associated with, and future developments of, the pandemic. The effects of the COVID-19 pandemic and restrictive quarantine measures imposed by the Chinese government in response have adversely affected our business, and may continue to adversely affect our business, perhaps significantly, for the remainder of this fiscal year and beyond, depending on the nature, severity, and duration of the ongoing effects of the COVID-19 pandemic, particularly in mainland China a jurisdiction where our operations are primarily located.

Specifically, the PCAOB is currently unable to conduct inspections without the approval of Chinese authorities, there have been concerns regarding oversight of the audits ofCOVID-19 pandemic has adversely impacted our operations, business, and 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 2022results, including our Audit Committee approved the engagement of KPMG, a U.S. auditor that is subject to inspection by the PCAOB, asmanufacturing and supply chain, 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 ofand our securities on a national securities exchange, including Nasdaq, or on
over-the-counter
markets in the United States. In addition, the U.S. Senatepartners’ sales, marketing, 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 shares and/or ADSsclinical trial operations, and our ability to raise capital effectively.
Auditorsadvance our research and development activities and pursue the development of companies that are registeredour pipeline products. For example, due to service interruptions to hospitals and treatment centers in mainland China arising in connection with the SECoutbreak of COVID-19, some patients have experienced difficulties in accessing hospital care and, traded publiclyas a result, they have had limited or 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. Decreased access to our products has an adverse effect on our revenue. We expect the majority of the impact on our revenue from the lockdown measures in mainland China from March 2022 to May 2022 to be reflected in our results for the second half of 2022. In addition, we have experienced delays in the enrollment of patients in our clinical trials due to outbreaks of COVID-19 where we are conducting such trials. Our commercial partners and licensors also have similarly experienced delays in enrollment of patients to their clinical trials due to outbreaks of COVID-19 in their respective territories. Although so far none of our
34

NDA submissions and acceptances, key clinical development milestones, or clinical trial application approvals have been materially delayed, there is no guarantee this will continue to be the case.

Additionally, the COVID-19 government restrictions and shutdown orders – those currently in effect and those which may be imposed in the future – may 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 COVID-related restrictions in Shanghai resume or are enhanced, such restrictions may impact the distribution and sale of our products within Greater China. These and other government restrictions may limit our and our distributors’ ability to successfully sell our commercial products in Greater China, even if we implement contingency plans. Any or all of these adverse effects arising from COVID-19 may adversely affect our business and results of operations this year, and perhaps beyond, or cause the value of the Company to decline, potentially limiting our ability to obtain additional financing on terms acceptable to the Company.

COVID-19 government restrictions and lockdown orders, including those requiring our employees to work from their homes or preventing our executives from traveling to or from mainland China, Hong Kong, and the United States, includingcould also negatively affect our independent registered public accounting firm,business, such as through absenteeism or employee turnover, other operational disruptions, or increased risk of a cybersecurity incident.

There 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 addressedno comparable recent events that provide guidance 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,effect 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 issuerCOVID-19 outbreak 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 securitiesglobal pandemic 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,have 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, the ultimate impact of anticipated negative impactsthe pandemic is highly uncertain and subject to change, and the actual effects on our business and results 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 ofwill depend on many factors beyond our actual operating performance.
control.

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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 Draftrevised Provisions on Strengthening Confidentiality and Archives Rules,Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments), released by the CSRC for public comment on April 2, 2022 (the “Draft Archives Rules”), where Chinese domestic companies (including Chinese domestic companies that are listed outside of mainland 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 mainland 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 mainland 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 ArchiveArchives 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 mainland China under the Draft ArchiveArchives 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 clinical development, 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 likesuch as due to delays in certain partnered studies or as a result of imposed or threatened sanctions on China, Chinese banks, or companies with operations in China or heightened tensions between the United States and China choose to respondas a result of actions taking in response to this war. As a result,

Although our business and financial results have not yet been adversely affected by the value of our ordinary shareswar in Ukraine, and ADSs may significantly decline.
Although we do not conduct business in Russia or Ukraine, our business and financial results, including our development programs, 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, there have been, and may continue to be, delays in connection with this war,certain partnered studies. In addition, the United States and other nations have raised the possibility of secondary sanctions on China, Chinese banks, and Chinese businessescompanies with operations in China that do business with Russia or its allies, including Belarus. WeAlthough we do not conduct business in Russia or Belarus, or with Russian or Belarusian counterparties, but we may be impacted by sanctions ifimposed on 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.banks. 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. IfSuch actual or threatened sanctions are imposed or if this war continues or expands, or leads toand other geopolitical factors arising in connection with the way, such as continued political or economic instability terrorist activity, or further government actions or increased economic or political tensions between the United States and China, could also adversely affect our business and financial
35

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,ADSs.

Our results of operations 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 betweenevent of a sustained period of increased inflation.

The global economy, including 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 conditionseconomy, has experienced rising inflation in recent quarters. Increased inflation 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 effectimpact on our expenses and, as a result, 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;
operations. 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 reviewsource key materials from the Committee on Foreign Investmentthird parties located in the United States, either directly through agreements with suppliers or CFIUS, which may delay or block a transaction from closing;
Changes in United States and international trade policies and relations, particularlyindirectly through our manufacturers who have agreements with regard to mainland China, may adversely impactsuppliers, as well as through 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 thatlicensors. For example, 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 partiesTurning Point to conduct our
pre-clinical
manufacture and clinical trials. If these third parties do not successfully carry out their contractual dutiessupply TPX-0022 and repotrectinib (TPX-0005), argenx to manufacture and supply efgartigimod, MacroGenics to manufacture and supply margetuximab, tebotelimab and a pre-clinical multi-specific TRIDENT molecule, Entasis to manufacture and supply SUL-DUR, Novocure to manufacture and supply Optune, Deciphera to manufacture and supply QINLOCK, Incyte to manufacture and supply retifanlimab (INCMGA0012 (PD-1)), Regeneron to manufacture and supply odronextamab, Mirati to manufacture and supply adagrasib, and Blueprint to manufacture and supply BLU-701 and BLU-945. Sustained or meet expected deadlines, werising inflation may not be ableresult in increased cost 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 forus in obtaining supplies of our products and product candidates, through intellectual property rights, or if the scopekey materials relating thereto. As a result, our results of such intellectual property rights obtained is not sufficiently broad, third partiesoperations may compete directly against us;
be adversely impacted.
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.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.

On June 22, 2022, the Company filed a Current Report on Form 8-K (the “Form 8-K”) to report on the voting results of the Company’s 2022 annual general meeting held on June 22, 2022 (the “Annual General Meeting”), including, among other matters, the results of the advisory non-binding votes of its shareholders regarding whether shareholder votes to approve the compensation of its named executive officers required by Section 14A(a)(1) of the Exchange Act and Rule 14a-21(a) promulgated thereunder (the “Say-on-Pay Vote”) should be held every one, two, or three years (the “Say-on-Frequency Proposal”). As previously reported on the Form 8-K, in an advisory vote held at the Annual General Meeting on the Say-on-Frequency Proposal, the Company’s shareholders expressed their preference for a Say-on-Pay Vote to be conducted every year. On July 13, 2022, the Company’s Board of Directors considered the outcome of this advisory vote and determined that future Say-on-Pay Votes will be conducted every year. The Company’s Board of Directors will re-evaluate this determination after the next Say-on-Frequency Proposal, which will be held no later than the 2028 annual general meeting of shareholders.
None.
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Item 6. Exhibits.
Exhibit Index
Exhibit
Number
Exhibit
Title
3.1         
4.2
10.1#
10.2#
31.1*
4.3Registrant’s Specimen Certificate for Ordinary Shares (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-8 (File No. 333-264800) filed with the SEC on May 9, 2022).
4.5*Description 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)
* Filed herewith
** Furnished herewith
# Management contract or compensatory plan

*
Filed herewith
**
Furnished herewith

36
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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,August 9, 2022By: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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