UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-Q
______________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number: 001-38068
______________________________________
(Exact name of registrant as specified in its charter)
______________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||
(Address of principal executive offices, including zip code)
(604 ) 678-1388
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
______________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ☐ No ☒
The number of outstanding common shares of the registrant, no par value per share, as of May 2, 2022 was 57,771,204 .
ZYMEWORKS INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 2022
Table of Contents
Page | ||||||||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and “forward-looking information” within the meaning of Canadian securities laws, or collectively, forward-looking statements. Forward-looking statements include statements that may relate to our plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs and other information that is not historical information. Many of these statements appear, in particular, under the headings “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Forward-looking statements can often be identified by the use of terminology such as “subject to,” “believe,” “anticipate,” “plan,” “expect,” “intend,” “estimate,” “project,” “may,” “will,” “should,” “would,” “could,” “can,” the negatives thereof, variations thereon and similar expressions, or by discussions of strategy. In addition, any statements or information that refer to expectations, beliefs, plans, projections, objectives, performance or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking. In particular, these forward-looking statements include, but are not limited to, statements about:
•the size of our addressable markets and our ability to commercialize product candidates;
•the achievement of advances in and expansion of our therapeutic platforms and antibody engineering expertise;
•the likelihood of product candidate development and clinical trial progression, initiation or success;
•our ability to predict and manage government regulation; and
•the impact of the COVID-19 pandemic on our business and operations.
All forward-looking statements, including, without limitation, those related to our examination of historical operating trends, are based upon our current expectations and various assumptions. Certain assumptions made in preparing the forward-looking statements include:
•our ability to implement our restructuring announced in January 2022 and to manage the size of our organization effectively;
•the absence of material adverse changes in our industry or the global economy;
•our ability to understand and predict trends in our industry and markets;
•our ability to maintain good business relationships with our strategic partners;
•our ability to comply with current and future regulatory standards;
•our ability to protect our intellectual property rights;
•our continued compliance with third-party license terms and the non-infringement of third-party intellectual property rights;
•our ability to manage and integrate acquisitions;
•our ability to retain key personnel; and
•our ability to raise sufficient debt or equity financing to support our continued growth.
We believe there is a reasonable basis for our expectations and beliefs, but they are inherently uncertain. We may not realize our expectations, and our beliefs may not prove correct. Actual results could differ materially from those described or implied by such forward-looking statements. The following uncertainties and factors, among others (including those set forth under “Risk Factors”), could affect future performance and cause actual results to differ materially from those matters expressed in or implied by forward-looking statements:
•our ability to obtain regulatory approval for our product candidates without significant delays;
•the predictive value of our current or planned clinical trials;
i
•delays with respect to the development and commercialization of our product candidates, which may cause increased costs or delay receipt of product revenue;
•our or any of our partners’ ability to enroll subjects in clinical trials and thereby complete trials on a timely basis;
•the design or our execution of clinical trials may not support regulatory approval, including where clinical trials are conducted outside the United States;
•the extent to which our business may be adversely affected by the COVID-19 pandemic;
•global economic and political conditions, including as a result of the Russian invasion of Ukraine, and the related impact on our business and the markets generally;
•the Fast Track and Breakthrough Therapy designations for any of our product candidates may not expedite regulatory review or approval;
•the U.S. Food and Drug Administration (the “FDA”) may not accept data from trials we conduct outside the United States;
•disruptions at the FDA and other government agencies caused by funding shortages or global health concerns;
•our discretion to discontinue or reprioritize the development of any of our product candidates;
•the potential for our product candidates to have undesirable side effects;
•no regulatory agency has made a determination that any of our product candidates are safe or effective for use by the general public or for any indication;
•our ability to face significant competition, including biosimilar products;
•the likelihood of broad market acceptance of our product candidates;
•our ability to obtain Orphan Drug Designation or exclusivity for some or all of our product candidates;
•our ability to commercialize products outside of the United States;
•the outcome of reimbursement decisions by third-party payors relating to our products;
•our expectations with respect to the market opportunities for any product that we or our strategic partners develop;
•our ability to pursue product candidates that may be profitable or have a high likelihood of success;
•our ability to use our therapeutic platforms to build a pipeline of product candidates;
•our ability to meet the requirements of ongoing regulatory review;
•the threat of product liability lawsuits against us or any of our strategic partners;
•changes in product candidate manufacturing or formulation that may result in additional costs or delay;
•the potential disruption of our business and dilution of our shareholdings associated with acquisitions and joint ventures;
•the potential for governments to impose strict price controls;
•the risk of security breaches and incidents or data loss, which could compromise sensitive business or health information;
•current and future legislation that may increase the difficulty and cost of commercializing our product candidates;
•economic, political, regulatory and other risks associated with international operations;
ii
•our exposure to legal and reputational penalties as a result of any of our current and future relationships with various third parties;
•our ability to comply with export control and import laws and regulations;
•our history of significant losses since inception;
•our ability to generate revenue from product sales and achieve profitability;
•our requirement for substantial additional funding;
•the potential dilution to our shareholders associated with future financings;
•restrictions on our ability to seek financing, which may be imposed by future debt;
•our ability to maintain existing and future strategic partnerships;
•our ability to realize the anticipated benefits of our strategic partnerships;
•our ability to secure future strategic partners;
•our reliance on third-party manufacturers to produce our product candidate supplies and on other third parties to provide supplies and store, monitor and transport bulk drug substance and drug product;
•our reliance on third parties to oversee clinical trials of our product candidates and, in some cases, maintain regulatory files for those product candidates;
•our reliance on third parties for various operational and administrative aspects of our business including our reliance on third parties’ cloud-based software platforms;
•our ability to operate without infringing the patents and other proprietary rights of third parties;
•our ability to obtain and enforce patent protection for our product candidates and related technology;
•our patents could be found invalid or unenforceable if challenged;
•our intellectual property rights may not necessarily provide us with competitive advantages;
•we may become involved in expensive and time-consuming patent lawsuits;
•the risk that the duration of our patents will not adequately protect our competitive position;
•our ability to obtain protection under the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Amendments”) and similar legislation;
•we may be unable to protect the confidentiality of our proprietary information;
•our ability to comply with procedural and administrative requirements relating to our patents;
•the risk of claims challenging the inventorship of our patents and other intellectual property;
•our intellectual property rights for some of our product candidates are dependent on the abilities of third parties to assert and defend such rights;
•patent reform legislation and court decisions can diminish the value of patents in general, thereby impairing our ability to protect our products;
•we may not be able to protect our intellectual property rights throughout the world;
iii
•we will require FDA approval for any proposed product candidate names and any failure or delay associated with such approval may adversely affect our business;
•the risk of employee misconduct including noncompliance with regulatory standards and insider trading;
•our ability to market our products in a manner that does not violate the law and subject us to civil or criminal penalties;
•if we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected;
•our ability to retain key executives and attract and retain qualified personnel;
•our exposure to potential securities class action litigation; and
•if securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.
Consequently, forward-looking statements should be regarded solely as our current plans, estimates and beliefs. You should not place undue reliance on forward-looking statements. We cannot guarantee future results, events, levels of activity, performance or achievements. We do not undertake and specifically decline any obligation to update, republish or revise forward-looking statements to reflect future events or circumstances or to reflect the occurrences of unanticipated events, except as required by law. Our Risk Factors are not guarantees that no such conditions exist as of the date of this report and should not be interpreted as an affirmative statement that such risks or conditions have not materialized, in whole or in part.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.
We own or have rights to trademarks, service marks or trade names that we use in connection with the operation of our business. In addition, our names, logos and website names and addresses are our service marks or trademarks. Azymetric, Zymeworks, ZymeCAD, EFECT, ZymeLink and the phrase “Building Better Biologics” are our registered trademarks. The other trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. Solely for convenience, the trademarks, service marks, tradenames and copyrights referred to in this Quarterly Report on Form 10-Q are listed without the ©, ® and TM symbols, but we will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and tradenames.
We express all amounts in this Quarterly Report on Form 10-Q in U.S. dollars, except where otherwise indicated. References to “$” and “US$” are to U.S. dollars and references to “C$” are to Canadian dollars.
Except as otherwise indicated, references in this Quarterly Report on Form 10-Q to “Zymeworks,” the “Company,” “we,” “us” and “our” refer to Zymeworks Inc. and its subsidiaries.
iv
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Zymeworks Inc.
Index to Interim Condensed Consolidated Financial Statements (unaudited)
As of and for the three months ended March 31, 2022
Page | |||||
1
ZYMEWORKS INC.
Condensed Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars except share data)
| March 31, 2022 | December 31, 2021 | ||||||||||
| (unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments (note 5) | |||||||||||
| Accounts receivable | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Deferred financing fees | |||||||||||
| Long-term investments (note 5) | |||||||||||
| Long-term prepaid assets | |||||||||||
| Deferred tax asset | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Intangible assets, net | |||||||||||
| Acquired in-process research and development (note 6) | |||||||||||
| Goodwill (note 6) | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and shareholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued liabilities (note 7) | $ | $ | |||||||||
| Fair value of liability classified stock options (note 12) | |||||||||||
| Current portion of operating lease liability (note 11) | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term portion of operating lease liability (note 11) | |||||||||||
| Deferred revenue (note 9) | |||||||||||
| Other long-term liabilities (note 7) | |||||||||||
| Deferred tax liability | |||||||||||
| Total liabilities | |||||||||||
| Shareholders’ equity: | |||||||||||
Common shares, no par value; unlimited authorized shares at March 31, 2022 and December 31, 2021, respectively; | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
| Research collaboration and licensing agreements (note 9) | |||||||||||
| Commitments and contingencies (note 13) | |||||||||||
The accompanying notes are an integral part of these financial statements
2
ZYMEWORKS INC.
Condensed Consolidated Statements of Loss and Comprehensive Loss
(Expressed in thousands of U.S. dollars except share and per share data)
(unaudited)
| Three Months Ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Revenue | ||||||||||||||
| Research and development collaborations (note 9) | $ | $ | ||||||||||||
| Operating expenses: | ||||||||||||||
| Research and development | ||||||||||||||
| General and administrative | ||||||||||||||
| Total operating expenses | ||||||||||||||
| Loss from operations | ( | ( | ||||||||||||
| Other income (expense): | ||||||||||||||
| Interest income | ||||||||||||||
| Other (expense) income, net (note 10) | ( | |||||||||||||
| Total other income (expense), net | ( | |||||||||||||
| Loss before income taxes | ( | ( | ||||||||||||
| Income tax recovery (expense) | ( | |||||||||||||
| Net loss and comprehensive loss | $ | ( | $ | ( | ||||||||||
| Net loss per common share (note 4): | ||||||||||||||
| Basic | $ | ( | $ | ( | ||||||||||
| Diluted | $ | ( | $ | ( | ||||||||||
| Weighted-average common shares outstanding (note 4): | ||||||||||||||
| Basic | ||||||||||||||
| Diluted | ||||||||||||||
The accompanying notes are an integral part of these financial statements
3
ZYMEWORKS INC.
Condensed Consolidated Statement of Changes in Shareholders’ Equity
(Expressed in thousands of U.S. dollars except share data)
(unaudited)
| Common shares | Accumulated deficit | Accumulated other comprehensive loss | Additional paid-in capital | Total shareholders’ equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Issuance of common shares on exercise of options | — | — | ( | ||||||||||||||||||||||||||||||||
| Issuance of common shares through employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common shares upon vesting of restricted stock units ("RSUs") | — | — | ( | ||||||||||||||||||||||||||||||||
| Stock-based compensation (recovery) | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Issuance of common shares and pre-funded warrants in connection with public offering, net of offering costs (notes 8a and 8d) | — | — | |||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Common shares | Accumulated deficit | Accumulated other comprehensive loss | Additional paid-in capital | Total shareholders’ equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Issuance of common shares on exercise of options | — | — | ( | ||||||||||||||||||||||||||||||||
| Issuance of common shares through employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common shares upon vesting of restricted stock units RSUs | — | — | ( | ||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements
4
ZYMEWORKS INC.
Condensed Consolidated Statements of Cash Flows
(Expressed in thousands of U.S. dollars)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Items not involving cash: | |||||||||||
| Depreciation of property and equipment | |||||||||||
| Amortization of intangible assets | |||||||||||
| Stock-based compensation recovery | ( | ( | |||||||||
| Amortization of operating lease right-of-use assets | |||||||||||
| Deferred income tax expense | |||||||||||
| Change in fair value of contingent consideration liability | |||||||||||
| Change in fair value of investments in equity instruments | ( | ||||||||||
| Unrealized foreign exchange loss | |||||||||||
| Changes in non-cash operating working capital: | |||||||||||
| Accounts receivable | |||||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Accounts payable and accrued liabilities | ( | ||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from public offering, net of issuance costs (note 8a) | |||||||||||
| Issuance of common shares on exercise of stock options (note 8e) | |||||||||||
| Issuance of common shares through employee stock purchase plan | |||||||||||
| Deferred financing fees | ( | ||||||||||
| Finance lease payments | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Net redemptions (purchases) of short-term investments | |||||||||||
| Acquisition of property and equipment | ( | ( | |||||||||
| Acquisition of intangible assets | ( | ||||||||||
| Net cash provided by investing activities | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| Net change in cash and cash equivalents | |||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Supplemental disclosure of non-cash investing and financing items: | |||||||||||
| Leased assets obtained in exchange for operating lease liabilities | $ | $ | |||||||||
| Acquisition of property and equipment in accounts payable and accrued liabilities | |||||||||||
The accompanying notes are an integral part of these financial statements
5
ZYMEWORKS INC.
Notes to the Interim Condensed Consolidated Financial Statements
(unaudited)
(Expressed in thousands of U.S. dollars except share and per share data)
1. Nature of Operations
Zymeworks Inc. (the “Company” or “Zymeworks”) is a clinical-stage biopharmaceutical company dedicated to the development of next-generation multifunctional biotherapeutics. Zymeworks was incorporated on September 8, 2003 under the laws of the Canada Business Corporations Act. On October 22, 2003, the Company was registered as an extra-provincial company under the Company Act (British Columbia). On May 2, 2017, the Company continued under the Business Corporations Act (British Columbia).
Since its inception, the Company has devoted substantially all of its resources to research and development activities, including developing its therapeutic platforms, and identifying and developing potential product candidates by undertaking preclinical studies and clinical trials. The Company supports these activities through general and administrative support, as well as by raising capital, conducting business planning and protecting its intellectual property.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, these financial statements do not include all the information and footnotes required for complete financial statements and should be read in conjunction with the audited consolidated financial statements of the Company and the accompanying notes thereto for the year ended December 31, 2021.
These unaudited interim condensed consolidated financial statements reflect all adjustments, consisting solely of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods presented. The results of operations for the three months ended March 31, 2022 and 2021 are not necessarily indicative of results that can be expected for a full year. These unaudited interim condensed consolidated financial statements follow the same significant accounting policies as those described in the notes to the audited consolidated financial statements of the Company for the year ended December 31, 2021.
All amounts expressed in the interim condensed consolidated financial statements of the Company and the accompanying notes thereto are expressed in thousands of U.S. dollars, except for share and per share data and where otherwise indicated. References to “$” are to U.S. dollars and references to “C$” are to Canadian dollars.
Use of Estimates
The preparation of interim condensed consolidated financial statements in accordance with U.S. GAAP requires the Company to make estimates and judgments in certain circumstances that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, most notably those related to revenue recognition including estimated timing of completion of performance obligations required to meet revenue recognition criteria, accrual of expenses including clinical and preclinical study expense accruals, stock-based compensation, valuation allowance for deferred taxes, benefits under the Scientific Research and Experimental Development (“SR&ED”) program, and other contingencies. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from these estimates.
The full extent to which the COVID-19 pandemic may directly or indirectly impact the Company’s business, results of operations and financial condition, including revenues, expenses, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are evolving and highly uncertain, such as the duration and severity of outbreaks, including potential future waves or cycles, and the effectiveness of actions taken to contain and treat COVID-19. The Company considered the potential impact of COVID-19 when making certain estimates and judgments relating to the preparation of these interim condensed consolidated financial statements. While there was no material impact to the Company’s interim
6
3. Recent Accounting Pronouncements
Recent accounting pronouncements not yet adopted
The Company has reviewed recent accounting pronouncements and concluded that they are either not applicable to the business, or that no material effect is expected on the consolidated financial statements as a result of future adoption.
4. Net loss per share
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net loss attributable to common shareholders: | |||||||||||||||||||||||
| Basic | $ | ( | $ | ( | |||||||||||||||||||
| Adjustment for change in fair value of liability classified stock options | ( | ||||||||||||||||||||||
| Diluted | $ | ( | $ | ( | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average common shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Adjustment for dilutive effect of liability classified stock options | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Net loss per common share – basic | $ | ( | $ | ( | |||||||||||||||||||
| Net loss per common share – diluted | $ | ( | $ | ( | |||||||||||||||||||
Weighted average number of common shares used in the basic and diluted earnings per share calculations include the pre-funded warrants issued in connection with the Company’s June 2019, January 2020 and January 2022 offerings as the warrants are exercisable at any time for nominal cash consideration.
5. Investments
Short-term Investments
Short-term investments are denominated in U.S. dollars or Canadian dollars and consist of guaranteed investment certificates (“GICs”) acquired from financial institutions in accordance with the Company’s cash investment policy. Short-term GICs are classified as held to maturity and are accounted for at amortized cost.
Long-term Investments
7
6. IPR&D and Goodwill
Acquired IPR&D
In-process research and development assets (“IPR&D”) acquired in the 2016 Kairos Therapeutics Inc. (“Kairos”) business combination are classified as indefinite-lived intangible assets and are not currently being amortized. The carrying value of IPR&D, net of impairment was $17,628 no impairment indicators related to IPR&D as of March 31, 2022.
Goodwill
7. Liabilities
| March 31, 2022 | December 31, 2021 | ||||||||||
| Trade payables | $ | $ | |||||||||
| Accrued research and development expenses | |||||||||||
| Employee compensation and vacation accruals | |||||||||||
| Accrued legal and professional fees | |||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||
| Liability for contingent consideration (note 12) | $ | $ | |||||||||
| Liability from in-licensing agreements | |||||||||||
| Total | $ | $ | |||||||||
8. Shareholders’ Equity
a.Equity Offerings
2022 Public Offering
On January 31, 2022, the Company closed a public offering pursuant to which the Company sold 11,035,000 common shares, including the sale of 1,875,000 common shares to the underwriters upon their full exercise of their over-allotment option, at $8.00 per common share and 3,340,000 Pre-Funded Warrants (note 8d) in lieu of common shares at $7.9999 per Pre-Funded Warrant. Net proceeds were $107,534 , after underwriting discounts, commissions and offering expenses.
b.Authorized
The Company has an unlimited authorized number of voting common shares and preferred shares without par value.
8
c.Preferred Shares
As of March 31, 2022 and December 31, 2021, no
d.Pre-Funded Common Share Warrants
In connection with a public offering completed on June 24, 2019, the Company issued 4,166,690 Pre-Funded Warrants at a price of $17.9999 per Pre-Funded Warrant which granted holders of warrants the right to purchase up to 4,166,690 common shares of the Company, at an exercise price of $0.0001 per share.
In connection with a public offering completed on January 27, 2020, the Company issued 1,075,271 Pre-Funded Warrants at a price of $46.4999 per Pre-Funded Warrant which granted holders of warrants the right to purchase up to 1,075,271 common shares of the Company, at an exercise price of $0.0001 per share.
In connection with a public offering completed on January 31, 2022 (note 8a), the Company issued 3,340,000 Pre-Funded Warrants at a price of $7.9999 per Pre-Funded Warrant which granted holders of warrants the right to purchase up to 3,340,000 common shares of the Company, at an exercise price of $0.0001 per share.
The Pre-Funded Warrants are exercisable by the holders at any time on or after the original issue date. The Pre-Funded Warrants do not expire unless they are exercised or settled in accordance with the Pre-Funded Warrant agreement. As the Pre-Funded Warrants meet the condition for equity classification, proceeds from issuance of the Pre-Funded Warrants, net of any transaction costs, are recorded in additional paid-in capital. Upon exercise of the Pre-Funded Warrants, the historical costs recorded in additional paid-in capital along with exercise price collected from holders will be recorded in common shares. No Pre-Funded Warrants have been exercised to date.
e.Stock-Based Compensation
Original Stock Option Plan
On July 14, 2006, the shareholders of the Company approved an employee stock option plan (the “Original Plan”). The Original Plan provides for the granting of options to directors, officers, employees and consultants. Options to purchase common shares may be granted at an exercise price of each option equal to the last private issuance of common shares immediately preceding the date of the grant. The total number of options outstanding is not to exceed 20 % of the issued common shares of the Company.
Options granted under the Original Plan are exercisable at various dates over their 10 -year life. Common shares are issued from treasury when options are exercised.
The exercise prices of the Company’s stock options under the Original Plan are denominated in Canadian dollars. The Canadian dollar amounts have been translated to U.S. dollars using the period end rate or the average foreign exchange rate for the period, as applicable, and have been provided for information purposes. Upon the effectiveness of the Company’s New Plan described below, no further options were issuable under the Original Plan. However, all outstanding options granted under the Original Plan remain outstanding, subject to the terms of the Original Plan and the applicable grant documents, until such outstanding options are exercised or they terminate or expire by their terms.
New Stock Option and Equity Compensation Plan
On April 10, 2017, the Company’s shareholders approved a new stock option plan, which became effective immediately prior to the consummation of the Company’s IPO. This plan allows for the grant of options to directors, officers, employees and consultants in U.S. or Canadian dollars, and also permits the Company to grant incentive stock options (“ISOs”), within the meaning of Section 422 of the Internal Revenue Code, to its employees. On June 7, 2018, the Company’s shareholders approved an amendment and restatement of this plan (this plan, as amended and restated, the “New Plan”), which includes an article that allows the Company to grant restricted shares, restricted share units (“RSUs”) and other share-based awards, in addition to stock options. On March 4, 2020, the Board of Directors approved certain minor amendments to the New Plan that did not require shareholder approval.
The original maximum number of common shares reserved for issuance under the New Plan as of June 7, 2018 was 5,686,097 , which includes 3,686,097 shares issuable upon exercise of options outstanding as of March 31, 2018. Beginning in 2019 and ending in 2028, this maximum number may be increased on the first day of each calendar year by up to 4.0 % of the number of
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outstanding shares on the last day of the immediately preceding calendar year. As of March 31, 2022, 978,461 common shares were available for future award grants under the New Plan (December 31, 2021: 952,632 common shares). ISOs may be granted with respect to a maximum fixed amount equal to 20 % of the shares reserved for issuance under the New Plan as of June 7, 2018.
On January 5, 2022, the Board approved the "Zymeworks Inc. Inducement Stock Option and Equity Compensation Plan" and reserved 750,000 of the Company’s common shares for issuance pursuant to equity awards granted thereunder.
RSUs
During the year-ended December 31, 2020, the Company started granting RSUs to certain employees, which typically vest over a period of three years , in the amount of one-third each year on the anniversary of the grant date. RSUs are equity-settled on each vesting date, subject to the grantee’s continued employment with the Company on the vesting date. The fair value of RSUs granted was calculated by using the Company's closing stock price on the grant date.
| Number of RSUs | Weighted- average grant date fair value ($) | ||||||||||
| Outstanding, December 31, 2021 | |||||||||||
| Granted | |||||||||||
| Vested and settled | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Outstanding, March 31, 2022 | |||||||||||
As of March 31, 2022, there was $2,678 of unamortized RSU expense that will be recognized over a weighted average period of 1.34 years.
Stock Options
All options granted under the New Plan will have an exercise price determined and approved by the Board of Directors on the date of the grant, which shall not be less than the market price of the common shares at such time. For the purposes of the New Plan, the market price of a common share shall be the closing sale price of a share on the grant date reported by the stock exchange with the greatest trading volume or, if such day is not a trading day, the closing sale price reported for the immediately preceding trading day. The Company may convert a market price denominated in Canadian dollars into United States dollars and vice versa and such converted amount shall be the market price.
An option shall be exercisable during a period established by the Board of Directors which shall commence on the date of the grant and shall terminate not later than ten years after the date of the granting of the option. The New Plan provides that the exercise period shall automatically be extended if the date on which it is scheduled to terminate shall fall during a black-out period. In such cases, the extended exercise period shall terminate on the tenth business day after the last day of the black-out period, provided that the exercise period shall in no case be extended beyond the tenth anniversary of the date the option was granted. All options shall vest in accordance with the terms of their grant agreements.
| Number of Options | Weighted- Average Exercise Price (C$) | Weighted- Average Exercise Price ($) | Weighted- Average Contractual Term (years) | Aggregate intrinsic value (C$) | Aggregate intrinsic value ($) | ||||||||||||||||||||||||||||||
| Outstanding, December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Granted | |||||||||||||||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||||||||||||||
| Forfeited | ( | ||||||||||||||||||||||||||||||||||
| Outstanding, March 31, 2022 | |||||||||||||||||||||||||||||||||||
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| Number of Options | Weighted- Average Exercise Price ($) | Weighted- Average Contractual Term (years) | Aggregate intrinsic value ($) | ||||||||||||||||||||
| Outstanding, December 31, 2021 | |||||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | |||||||||||||||||||||||
| Forfeited | ( | ||||||||||||||||||||||
| Outstanding, March 31, 2022 | |||||||||||||||||||||||
During the three months ended March 31, 2022, the Company received cash proceeds of $12 from stock options exercised.
The stock options outstanding at March 31, 2022 expire at various dates from July 1, 2022 to March 9, 2032.
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Research and development expense: | |||||||||||
| Stock-based compensation expense (recovery) for equity classified instruments | $ | ( | $ | ||||||||
| Change in fair value of liability classified instruments | ( | ( | |||||||||
| $ | ( | $ | |||||||||
| General and administrative expense: | |||||||||||
| Stock-based compensation expense (recovery) for equity classified instruments | $ | ( | $ | ||||||||
| Change in fair value of liability classified instruments | ( | ( | |||||||||
| $ | ( | $ | ( | ||||||||
| Finance expense (income): | |||||||||||
| Change in fair value of liability classified instruments | ( | ( | |||||||||
| $ | ( | $ | ( | ||||||||
Amounts for equity classified instruments above include stock-based compensation expense relating to RSUs of $604 for the three months ended March 31, 2022 (three months ended March 31, 2021: $606 ).
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Dividend yield | % | % | |||||||||
| Expected volatility | % | % | |||||||||
| Risk-free interest rate | % | % | |||||||||
| Expected average life of options | |||||||||||
Expected Volatility — Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. As the Company does not yet have sufficient history of its own volatility, the Company has identified several public entities of similar complexity and stage of development and calculates historical volatility using the volatility of these companies.
Risk-Free Interest Rate — This rate is from the Government of Canada and U.S. Federal Reserve marketable bonds for the month prior to each option grant during the year, having a term that most closely resembles the expected life of the option.
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Expected Term — This is the period of time that the options granted are expected to remain unexercised. Options granted have a maximum term of ten years . The Company uses the simplified method to calculate the average expected term, which represents the average of the vesting period and the contractual term.
Share Fair Value — Options granted after the Company’s IPO, are issued with exercise price equal to the fair market value of the Company’s common stock on the grant date. Before the IPO, the Company granted stock options at exercise prices not less than the fair value of its common shares as determined by the Board of Directors, with input from management. Management estimated the fair value of its common shares based on a number of objective and subjective factors, including the most recently available valuation of common shares prepared by independent valuation specialists, external market considerations affecting the biotechnology industry and the historic prices at which the Company sold common shares.
| March 31, 2022 | March 31, 2021 | ||||||||||
Dividend yield | % | % | |||||||||
Expected volatility | % | % | |||||||||
Risk-free interest rate | % | % | |||||||||
Expected average option term | |||||||||||
Number of liability classified stock options outstanding | |||||||||||
At March 31, 2022, the unamortized compensation expense related to unvested options was $31,448 . The remaining unamortized compensation expense as of March 31, 2022 will be recognized over a weighted-average period of 1.76 years.
f.Employee Stock Purchase Plan
On April 10, 2017, the Company’s shareholders approved an employee stock purchase plan (“ESPP”) which became effective immediately prior to the consummation of the Company’s IPO. On June 7, 2018, certain amendments to the ESPP were approved by shareholders. Prior to these amendments, the ESPP allowed eligible employees to acquire common shares at a discounted purchase price of 85% of the market value of the Company’s common shares on the purchase date. The ESPP, as amended, allows eligible employees to acquire common shares at a discounted purchase price of the lesser of (i) 85% of the market price of a common share on the first day of the applicable purchase period and (ii) 85% of the market price of a common share on the purchase date. The ESPP qualifies as an “employee stock purchase plan” within the meaning of Section 423 of the Code for employees who are United States taxpayers.
The Company currently holds offerings consisting of a single six-month purchase period commencing on January 1 and July 1 of each calendar year, with a single purchase date at the end of the purchase period on June 30 and December 31 of each calendar year.
Eligible employees are able to contribute up to 15 % of their gross base earnings for purchases under the ESPP through regular payroll deductions. Purchases of shares under the ESPP are limited for each employee at twenty-five thousand dollar worth of the Company’s common shares (determined using the lesser of (i) the market price of a common share on the first day of the applicable purchase period and (ii) the market price of a common share on the purchase date) for each year such purchase right is outstanding.
As this plan is considered compensatory, the Company recognizes compensation expense on these awards based on their estimated grant date fair value using the Black-Scholes option pricing model. The Company recognizes compensation expense in the consolidated statements of loss and comprehensive loss on a straight-line basis over the requisite service period. For the three months ended March 31, 2022, the Company recorded compensation expense of $183 (2021: $269 ) in research and development expense and general and administrative expense accounts. As of March 31, 2022, the total amount contributed by ESPP participants and not yet settled is $475 (December 31, 2021: $1,243 ).
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9. Research, Collaboration and Licensing Agreements
Revenue recognized from the Company’s strategic partnerships is summarized as follows:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Research support and other payments | $ | $ | |||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
Since December 31, 2021, there have not been any material changes to the key terms of our collaboration and license agreements. For further information on the terms and conditions of our existing collaboration and license agreements, please refer to the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year-ended December 31, 2021.
At March 31, 2022, contract assets from research, collaboration and licensing agreements were nil nil ) and contract liabilities were $32,941 (December 31, 2021: $32,941 ). Contract liabilities include deferred revenue relating to an upfront payment received in 2018 under the licensing and collaboration agreement with BeiGene. During the three months ended March 31, 2022, the Company did no t recognize any revenue from performance obligations satisfied in relation to the deferred revenue (three months ended March 31, 2021: nil ). Amounts not expected to be recognized as revenue in the next twelve months from March 31, 2022 have been classified as long-term deferred revenue.
10. Other (expense) income, net
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Foreign exchange loss, net | $ | ( | $ | ( | |||||||||||||||||||
| Other | |||||||||||||||||||||||
| $ | ( | $ | |||||||||||||||||||||
11. Leases
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| March 31, 2022 | December 31, 2021 | ||||||||||
Operating lease liabilities: | |||||||||||
Current portion | $ | $ | |||||||||
Long-term portion | |||||||||||
Total operating lease liabilities | $ | ||||||||||
Finance lease liabilities: | |||||||||||
Current portion included in other current liabilities | |||||||||||
Long-term portion included in other long-term liabilities | |||||||||||
Total finance lease liabilities | |||||||||||
Total lease liabilities | $ | $ | |||||||||
Cash paid for amounts included in the measurement of operating lease liabilities for the three months ended March 31, 2022 was $960 and was included in net cash used in operating activities in the consolidated statement of cash flows.
| Operating leases | |||||
| Within 1 year | $ | ||||
| 1 to 2 years | |||||
| 2 to 3 years | |||||
| 3 to 4 years | |||||
| 4 to 5 years | |||||
| Thereafter | |||||
| Total operating lease payments | |||||
| Less: | |||||
| Imputed interest | ( | ||||
| Operating lease liabilities | $ | ||||
As of March 31, 2022, the weighted average remaining lease term is 8.3 years and the weighted average discount rate used to determine the operating lease liability was 4.8 % for leases in Canadian dollars and 2.8 % for leases in U.S. dollars.
During the three months ended March 31, 2022, the Company incurred total operating lease expenses of $3,865 , which included lease expenses associated with fixed lease payments of $3,828 , and variable payments associated with common area maintenance and similar expenses of $37 .
12. Financial Instruments
The Company evaluates financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level of classification each reporting period. This determination requires the Company to make subjective judgments as to the significance of inputs used in determining fair value and where such inputs lie within the fair value hierarchy.
Fair Value Measurements
The Company measures certain financial instruments and other items at fair value.
To determine fair value, the Company uses a fair value hierarchy that prioritizes the inputs, assumptions and valuation techniques used to measure fair value. The three levels of the fair value hierarchy are as follows:
•Level 1 inputs are unadjusted quoted market prices for identical instruments available in active markets.
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•Level 2 inputs are inputs other than Level 1 prices, such as prices for a similar asset or liability that are observable either directly or indirectly. If the asset or liability has a contractual term, the input must be observable for substantially the full term. An example includes quoted market prices for similar assets or liabilities in active markets.
•Level 3 inputs are unobservable inputs for the asset or liability and will reflect management’s assessment about market assumptions that would be used to price the asset or liability.
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
The Company’s financial instruments consist of cash and cash equivalents, short-term and long-term investments in marketable and other securities, accounts receivable, accounts payable and accrued liabilities, contingent consideration, finance and operating lease obligations, and other long-term liabilities.
The carrying values of cash and cash equivalents, short-term investments in marketable securities, accounts receivable and accounts payable and accrued liabilities approximate their fair values due to the near-term maturities of these financial instruments. As at March 31, 2022, long-term investments in equity securities of private entities are accounted for as available for sale at their fair values. Other long-term liabilities for contingent consideration related to business acquisitions are recorded at fair value on the acquisition date and are adjusted quarterly for changes in fair value. Changes in the fair value of contingent consideration liabilities can result from changes in anticipated milestone payments and changes in assumed discount periods and rates. These inputs are unobservable in the market and therefore categorized as level 3 inputs as defined above.
The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis, and indicate the fair value hierarchy of the valuation techniques used to determine such fair value:
| March 31, 2022 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Commercial paper | $ | $ | — | $ | $ | — | |||||||||||||||||
| Investments: | |||||||||||||||||||||||
| GICs | — | — | |||||||||||||||||||||
| Total | $ | $ | — | $ | $ | — | |||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Liability for contingent consideration (note 13) | — | — | |||||||||||||||||||||
| Total | $ | $ | — | $ | — | $ | |||||||||||||||||
| December 31, 2021 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Commercial paper | $ | $ | — | $ | $ | — | |||||||||||||||||
| Investments: | |||||||||||||||||||||||
| GICs | — | — | |||||||||||||||||||||
| Total | $ | $ | — | $ | $ | — | |||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Liability for contingent consideration (note 13) | |||||||||||||||||||||||
| Total | $ | $ | — | $ | — | $ | |||||||||||||||||
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The following table presents the changes in fair value of the Company’s liability for contingent consideration:
| Liability at the beginning of the period | Increase (decrease) in fair value of liability for contingent consideration | Amounts paid or transferred to payables | Liability at end of the period | ||||||||||||||||||||
| Three months ended March 31, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents, short-term investments, long-term investments and accounts receivable. Cash and cash equivalents and investments in marketable securities are invested in accordance with the Company’s cash investment policy with the primary objective being the preservation of capital and maintenance of liquidity. The cash investment policy includes guidelines on the quality of financial instruments and defines allowable investments that the Company believes minimizes the exposure to concentration of credit risk. The Company limits its exposure to credit loss by placing its cash and cash equivalents and short-term investments with high credit quality financial institutions.
At March 31, 2022, the maximum exposure to credit risk for accounts receivable was $4,228 (December 31, 2021: $15,614 ) and all accounts receivable are due within the next 12 months. As at March 31, 2022 and December 31, 2021, the Company has recognized nominal amounts of provision for expected credit losses in relation to accounts receivable.
Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company’s short-term cash requirements are primarily to settle its financial liabilities, which consist primarily of accounts payable and accrued liabilities falling due within 45 days and current portion of lease obligations falling due within the next 12 months, with medium-term requirements to invest in property and equipment and research and development. The Company’s principal sources of liquidity to settle its financial liabilities are cash, cash equivalents and short-term investments, collection of accounts receivable relating to research collaboration and license agreements and additional public equity offerings as required. The Company believes that these principal sources of liquidity are sufficient to fund its operations for at least the next 12 months.
Foreign Currency Risk
The Company incurs certain operating expenses in currencies other than the U.S. dollar and accordingly is subject to foreign exchange risk due to fluctuations in exchange rates. The Company does not use derivative instruments to hedge exposure to foreign exchange risk due to the low volume of transactions denominated in foreign currencies. At March 31, 2022 , the Company’s net monetary assets denominated in Canadian dollars were $336 (C$486 ).
13. Commitments and Contingencies
Commitments
The Company has entered into research collaboration agreements with strategic partners in the ordinary course of operations that may include contractual milestone payments related to the achievement of pre-specified research, development, regulatory and commercialization events and indemnification provisions, which are common in such agreements. Pursuant to the agreements, the Company is obligated to make research and development and regulatory milestone payments upon the occurrence of certain events and royalty payments based on net sales. The maximum amount of potential future indemnification is unlimited, however, the Company currently holds commercial and product liability insurance that limits the Company’s liability and may enable it to recover a portion of any future amounts paid. Historically, the Company has not made any indemnification payments under such
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agreements and believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to indemnification obligations for any period presented in the interim condensed consolidated financial statements.
In connection with the Company’s 2016 Kairos acquisition, the Company may be required to make future payments to CDRD Ventures Inc. (“CVI”) upon the direct achievement of certain development milestones for products incorporating certain Kairos intellectual property, as well as royalty payments on the net sales of such products. For out-licensed products and technologies incorporating certain Kairos intellectual property, the Company may be required to pay CVI a mid-single digit percentage of the future revenue as a result of a revenue sharing agreement. As of March 31, 2022, the contingent consideration had an estimated fair value of $1,248 , which has been recorded within other long-term liabilities on the Company’s consolidated balance sheet (December 31, 2021: $1,498 ). The contingent consideration was calculated using a probability weighted assessment of the likelihood of the milestones being met, a probability adjusted discount rate that reflects the stage of the development and time to complete the development. Contingent consideration is a financial liability and measured at its fair value at each reporting period, with any changes in fair value from the previous reporting period recorded within research and development expenses in the statement of loss and comprehensive loss.
Contingencies
From time to time, the Company may be subject to various legal proceedings and claims related to matters arising in the ordinary course of business. The Company does not believe it is currently subject to any material matters where there is at least a reasonable possibility that a material loss may be incurred.
14. Restructuring
In January 2022, the Company started implementing a restructuring program (the "Restructuring") as part of its renewed focus on achieving its key strategic priorities and to help create a more cost-efficient organization in order to execute on its strategic priorities. In connection with the Restructuring, the Company made changes to its management team and reduced headcount by approximately 25 % as of March 31, 2022 compared to December 31, 2021. During the three months ended March 31, 2022, the Company recorded the following costs for the Restructuring:
•employee severance and termination benefits of $4,937 ;
•an offsetting non-cash reversal of previously recognized stock-based compensation expenses for unvested stock and RSU awards of $10,381 ; and
•other restructuring charges primarily related to accelerated depreciation and accelerated recognition of rent expense in relation to the shutdown of certain facilities of $3,266 and early termination of certain service contracts of $1,274 .
Of the net charges, $5,542 expense and $5,516 recovery of stock-based compensation were recorded in research and development expenses, and $3,935 expense and $4,865 stock-based compensation recovery were recorded in general and administrative expenses in the accompanying statements of operations and comprehensive loss.
As of March 31, 2022 the net outstanding liability related to employee severance termination benefits and other contract liabilities was approximately $5,966 . The Company recognized the majority of these charges during the three months ended March 31, 2022 and does not expect to incur any material additional costs related to the Restructuring.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the attached financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our audited financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2021 included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 24, 2022 and with the securities commissions in all provinces and territories of Canada on February 24, 2022. This Quarterly Report on Form 10-Q, including the following sections, contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. As a result of many factors, including without limitation those set forth under “Risk Factors” under Item 1A of Part II below, and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements. We caution the reader not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update forward-looking statements which reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q, except as required by law. Throughout this discussion, unless the context specifies or implies otherwise, the terms “Zymeworks,” “we,” “us,” and “our” refer to Zymeworks Inc. and its subsidiaries.
Overview
Zymeworks is a clinical-stage biopharmaceutical company dedicated to the development of next-generation multifunctional biotherapeutics. Our suite of complementary therapeutic platforms and our fully integrated drug development engine provide the flexibility and compatibility to precisely engineer and develop highly differentiated product candidates. These capabilities have resulted in multiple product candidates with the potential to drive positive outcomes in large underserved and unaddressed patient populations.
Our lead product candidate, zanidatamab, is a novel bispecific antibody that targets two distinct domains of the human epidermal growth factor receptor 2 (“HER2”). Zanidatamab’s unique binding properties result in multiple mechanisms of action that may enable it to address unmet need in patient populations with HER2-expressing cancers. In clinical trials, zanidatamab monotherapy and zanidatamab in combination with chemotherapy have been well tolerated with promising antitumor activity in patients with treatment-naive and heavily pretreated HER2-expressing cancers, including individuals whose disease had progressed on multiple prior treatment regimens that included HER2-targeted agents. Based on these data, a number of global multicenter clinical trials have been initiated to evaluate zanidatamab in specific indications and lines of therapy. These include pivotal clinical trials in (i) previously treated HER2 gene amplified biliary tract cancer (“BTC”) and (ii) first-line locally advanced or metastatic HER2-positive gastroesophageal adenocarcinomas (“GEA”) in combination with chemotherapy with or without BeiGene, Ltd.’s (“BeiGene”) tislelizumab, as well as proof of concept trials in (iii) first-line locally advanced or metastatic HER2-positive colorectal cancer (“CRC”), GEA, or BTC in combination with standard of care chemotherapy, (iv) first-line locally advanced or metastatic HER2-positive GEA in combination with tislelizumab and chemotherapy, (v) first-line locally advanced or metastatic HER2-positive breast cancer in combination with docetaxel, (vi) previously-treated locally advanced or metastatic HER2-positive, hormone receptor-positive breast cancer in combination with Pfizer’s Ibrance (palbociclib) and fulvestrant, and (vii) previously-treated locally advanced or metastatic HER2-expressing cancers (including HER2-positive and HER2-low breast cancer) in combination with ALX Oncology Inc.’s (“ALX Oncology”) evorpacept (ALX148).
Our second product candidate, ZW49, combines the unique design of zanidatamab with our ZymeLink antibody-drug conjugate (“ADC”) platform, comprised of our proprietary cytotoxin (cancer cell-killing compound) and cleavable linker. We designed ZW49 to be a best-in-class HER2-targeting ADC to further address unmet need across a range of HER2-expressing cancers. A Phase 1 clinical trial to establish safety and antitumor activity of ZW49 is currently ongoing.
We are also advancing a deep pipeline of preclinical product candidates and discovery-stage programs in oncology (including immuno-oncology agents) and other therapeutic areas.
Our proprietary capabilities and technologies include several modular, complementary therapeutic platforms that can be used in combination with each other and with existing approaches. This ability to layer technologies without compromising manufacturability enables us to engineer next-generation biotherapeutics with synergistic activity, which we believe will result in improved patient outcomes. Our platforms include:
•Azymetric, our bispecific platform, which enables therapeutic antibodies to simultaneously bind multiple distinct locations on a target (known as an epitope) or to multiple targets. This is achieved by tailoring multiple configurations of the antibody’s Fab regions (locations on the antibody to which epitopes bind);
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•ZymeLink, our ADC platform, comprised of cytotoxins and the linker technology used to couple these cytotoxins to tumor-targeting antibodies or proteins. This platform can be used in conjunction with our other therapeutic platforms to increase safety and efficacy as compared to existing ADC technologies;
•EFECT, which enables finely tuned modulation (both up and down) of immune cell recruitment and function; and
•ProTECT, which enables tumor-specific activity that may reduce systemic toxicity and simultaneously enhances localized immune co-stimulation or checkpoint modulation that may increase efficacy.
Our protein engineering expertise and proprietary structure-guided molecular modeling capabilities enable these therapeutic platforms. Together with our internal antibody discovery and generation technologies, we have established a fully integrated drug development engine and toolkit capable of rapidly delivering a steady pipeline of next-generation product candidates in oncology and other therapeutic areas.
Our Azymetric, EFECT and ZymeLink therapeutic platforms have been further leveraged through multiple revenue-generating strategic partnerships and collaborations with the following pharmaceutical companies: Merck Sharp & Dohme Research GmbH (“Merck”), Eli Lilly and Company (“Lilly”), Celgene Corporation and Celgene Alpine Investment Co. LLC (now a Bristol-Myers Squibb company, “BMS”), GlaxoSmithKline Intellectual Property Development Limited (“GSK”), Daiichi Sankyo Co., Ltd. (“Daiichi Sankyo”), Janssen Biotech, Inc. (“Janssen”), LEO Pharma A/S (“LEO”), BeiGene, Iconic Therapeutics, Inc. (“Iconic”) (and through our relationship with Iconic, Exelixis, Inc. (“Exelixis”)), and Atreca, Inc. (“Atreca”).
Our goal is to leverage our next-generation therapeutic platforms and proprietary protein engineering capabilities to become a leader in the discovery, development and commercialization of best-in-class multifunctional biotherapeutics for the treatment of cancer and other diseases with high unmet medical need.
Our key priorities to achieve this goal are to:
•fully recruit the HERIZON-BTC-01 pivotal clinical study for zanidatamab by mid-2022;
•fully recruit the HERIZON-GEA-01 pivotal clinical study for zanidatamab by the end of 2023;
•complete or close out other ongoing early-stage clinical studies for zanidatamab as data become available, and use these data to identify and support strategic decisions regarding future clinical development opportunities beyond the ongoing pivotal clinical studies;
•finalize a clear clinical development path for ZW49 based on additional clinical data expected in the second half of 2022 from the ongoing Phase 1 clinical trial;
•select and advance two new ADC or multispecific product candidates leveraging Zymeworks’ novel, therapeutic platforms (Azymetric™, ZymeLink™, EFECT™ and ProTECT™) to Investigational New Drug ("IND") enabling studies to provide the ability to submit two IND applications by the end of 2024;
•execute on new partnerships and collaborations to support the development and commercialization of zanidatamab and Zymeworks’ early-stage R&D pipeline and technology platforms;
•continue to support and advance Zymeworks’ core technology platforms and collaborations; and
•improve Zymeworks’ financial position over 2022 and 2023 through a combination of alternatives, including forming additional partnerships and collaborations, monetizing existing assets and products and securing additional financing.
We commenced operations in 2003 and have since devoted substantially all of our resources to research and development activities including developing our therapeutic platforms, identifying and developing potential product candidates and undertaking preclinical studies and clinical trials. Additionally, we have supported our research and development activities with general and administrative support, as well as by raising capital, conducting business planning and protecting our intellectual property. We have not generated any revenue from the sale of approved products to date and do not expect to do so until such time as we obtain regulatory approval and commercialize one or more of our product candidates. We cannot be certain of the timing or success of approval of our product candidates.
Since our initial public offering (“IPO”) in 2017, we have funded our operations primarily through follow-on public offerings, including the issuance of pre-funded warrants, and payments received under our license and collaboration agreements. Payments received from our license and collaboration agreements include upfront fees, milestone payments, as well as research support and reimbursement payments. Prior to our IPO, we also received financing from private equity placements and the issuance of convertible debt, which was subsequently converted into equity securities, and a credit facility. From inception to March 31, 2022, we received $910.5 million, net of equity issue costs, from these sources of financing including proceeds from exercises of stock options and employee stock purchase plans. As of March 31, 2022, we had $300.5 million of cash resources consisting of cash, cash equivalents and short-term investments.
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Although it is difficult to predict our funding requirements, based upon our current operating plan, we anticipate that our existing cash and cash equivalents and short-term investments as of March 31, 2022, combined with certain existing collaboration payments we anticipate receiving, will enable us to fund our planned operations for at least the next twelve months from the date this Quarterly Report on Form 10-Q is filed with the SEC.
We reported a net loss of $72.6 million for the three months ended March 31, 2022 and through March 31, 2022, we had an accumulated deficit of $755.7 million. Over the next several years, we expect to continue to incur losses as we increase our research and development expenditures in connection with the ongoing development of our product candidates and other clinical, preclinical and regulatory activities.
Recent Developments
COVID-19:
COVID-19 has impacted our research and development activities, but has not caused significant disruptions to our business operations to date. In March 2020, we transitioned our workforce to a remote working arrangement to protect the health and safety of our employees. In June 2020, we implemented a program to facilitate the phased return of employees to our lab and office facilities pursuant to enhanced health and safety protocols consistent with guidelines issued by local health authorities. Our preclinical research activities were supplemented by support from external contract research organizations (“CROs”) to complement the temporarily reduced capacity at our lab facilities. Certain clinical trial activities, including patient enrollment and site activations, were delayed or otherwise impacted by COVID-19. To date, COVID-19 has not had a material impact on our financial condition, liquidity or longer-term strategic development and commercialization plans.
The extent to which COVID-19 may cause more significant disruptions to our business and greater impacts to our results of operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the location, duration and severity of outbreaks, including potential future waves or cycles, and the effectiveness of actions to contain and treat COVID-19. A lack of coordinated responses on risk mitigation and global vaccination deployment with respect to the COVID-19 pandemic could result in significant increases to the duration and severity of the pandemic and could have a corresponding negative impact on our business. Insufficient vaccine availability, reduced effectiveness of vaccines over time or against new variants, or resistance to vaccination by certain persons may result in increasing infection and hospitalization rates, which have been and could be further complicated by the emergence of more virulent or infectious variants of the virus. We cannot predict the duration, scope and severity of any potential business shutdowns or disruptions that may result from future waves or cycles of outbreaks, including impacts to our ongoing and planned clinical studies and our regulatory approval prospects. Further prolonged shutdowns or other business interruptions could result in material and negative effects to our ability to conduct our business in the manner and on the timelines currently planned, which could have a material adverse impact on our business, results of operations, and financial condition. The COVID-19 pandemic continues to rapidly evolve, and we will continue to monitor the effects of COVID-19 on our business. See Part II - Item 1A, “Risk Factors – Risks Related to Our Business and the Development and Commercialization of Our Product Candidates – Our business has been and may continue to be adversely affected by the COVID-19 pandemic.”
Zanidatamab Clinical Program:
In April 2022, we announced the last patient enrolled in HERIZON-BTC-01, a global pivotal clinical trial evaluating the antitumor activity of zanidatamab monotherapy in patients with previously treated advanced or metastatic HER2-amplified BTC.
Also in April 2022, Zymeworks, in conjunction with its Asia-Pacific partner BeiGene, announced the acceptance of abstracts and plans to present data at the upcoming ASCO meeting in June on the first-line treatment of patients with HER2+ metastatic breast cancer using zanidatamab plus chemotherapy and on the first-line treatment of patients with HER2+ metastatic GEA using zanidatamab in combination with chemotherapy and tislelizumab.
ZW49 Clinical Program:
In our ongoing ZW49 Phase 1 dose-escalation study, the expansion cohorts evaluating 2.5 mg/kg every three weeks have completed enrollment of 30 patients. In parallel, we continue to evaluate an expansion cohort evaluating dosing at 1.5 mg/kg weekly and continue to enroll into the escalation cohort evaluating 1.75mg/kg weekly. Patient enrollment continues to progress well in both the weekly expansion and escalation cohorts and we remain on target to submit data for presentation at a major medical meeting in the second half of this year.
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Preclinical Programs:
In March 2022, we presented information on our topoisomerase 1 inhibitor (“TOPO1i”) ADC technology at the World ADC London conference. The presentation highlighted preclinical data and the development of our TOPO1i-based payload technology to be used in conjunction with our auristatin-based payload technology in the generation of fit-for-purpose and indication-specific ADCs.
Licensing and Collaboration Agreements:
In April 2022, Atreca announced a licensing agreement with Zymeworks to utilize our ZymeLink technology to develop novel ADCs. We received an undisclosed upfront payment in association with this licensing agreement in conjunction with future option exercise fees and development, regulatory, and commercial milestones as well as tiered royalties on net sales of any licensed products at single-digit royalty rates.
Financing Activities:
On January 31, 2022, we announced the closing of our underwritten public offering which consisted of the issuance of 11,035,000 common shares, including the exercise in full of the underwriters’ over-allotment option to purchase 1,875,000 additional shares, and, in lieu of common shares, to certain investors, pre-funded warrants to purchase up to 3,340,000 common shares. The common shares were sold at a price to the public of $8.00 per common share and the pre-funded warrants were sold at a price of $7.9999 per pre-funded warrant, for aggregate gross proceeds to the Company of $115.0 million, before deducting underwriting discounts and commissions and estimated offering expenses. The securities were offered in the United States pursuant to our final prospectus, dated January 26, 2022, to our U.S. automatic shelf registration statement on Form S-3ARS, including a prospectus dated October 1, 2021. No securities were offered or sold, directly or indirectly, in Canada or to any resident of Canada.
Executive Team Changes and Restructuring:
On January 5, 2022, we announced the appointment of Mr. Kenneth Galbraith as Chair of our Board of Directors, Chief Executive Officer and President, effective January 15, 2022. In connection with Mr. Galbraith’s appointment, Dr. Ali Tehrani resigned from the positions of President and Chief Executive Officer and as a member of our board of directors, effective January 15, 2022. We also announced the promotion of our Chief Financial Officer, Mr. Neil Klompas, to the dual position of Chief Operating Officer and Chief Financial Officer. Our Board of Directors also appointed Ms. Lota Zoth as the Board of Directors' lead independent director, effective January 15, 2022.
On January 19, 2022, we announced a restructuring of our workforce (the “Restructuring”), with a target of reducing employee headcount by at least 25% across the organization by the end of 2022. We took these steps as part of our renewed focus on achieving our key strategic priorities and to help create a more cost-efficient organization in order to execute on our strategic priorities. In connection with the Restructuring, we announced changes in our leadership, with the Executive Vice President, Early Development & Chief Scientific Officer, Chief People Officer and Chief Commercial Officer leaving the Company. As of March 31, 2022, we had exceeded the previously announced workforce reduction of 25%, ahead of schedule. The Company has incurred other restructuring charges in connection with the reduction in workforce which are disclosed in note 14 of our interim condensed financial statements included in this Quarterly Report on Form 10-Q. The Company recognized the majority of these charges during the three months ended March 31, 2022 and does not expect to incur any material additional costs related to the Restructuring.
On February 24, 2022, we announced the appointment of Dr. Christopher Astle to the role of Senior Vice President and Chief Financial Officer of the Company. Dr. Astle succeeds Mr. Klompas in the role of Chief Financial Officer. Following Dr. Astle’s appointment, Mr. Klompas has continued in his position as the Company’s Chief Operating Officer.
Strategic Partnerships and Collaborations
Our novel product candidates, together with the unique combination of proprietary protein engineering capabilities and resulting therapeutic platform technologies, have enabled us to enter into a number of strategic partnerships, many of which were subsequently expanded in scope. Our strategic partnerships and collaborations, including with Merck, BMS, GSK, Daiichi Sankyo, Janssen, LEO, BeiGene, and Iconic, provide us with the ability to accelerate clinical development of our product candidates in certain geographical regions and provide our strategic partners with access to components of our proprietary therapeutic platforms for their own therapeutics development. (Per an amendment of a sublicensing agreement between Iconic and Exelixis in December 2021, Iconic notified us that they will receive a one-time fee from Exelixis in exchange for all future milestones for Iconic’s ICON-2 program. As such, we will receive a share of this payment to Iconic. We continue to be eligible to
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receive future royalties pursuant to our agreement with Iconic.) In addition, these strategic partnerships have provided us with non-dilutive funding as well as access to proprietary therapeutic assets, which increase our ability to rapidly advance our product candidates while maintaining commercial rights to our own therapeutic pipeline. Under our strategic partnerships and collaboration agreements, we have received over $240.0 million to date in the form of non-refundable upfront payments and milestone payments. In addition, under our active strategic partnerships and collaboration agreements, we are eligible to receive up to $2.9 billion in preclinical and development milestone payments and $6.1 billion in commercial milestone payments, as well as tiered royalties on potential future product sales. It is possible, however, that our strategic partners’ programs will not advance as currently contemplated, which would negatively affect the amount of development and commercial milestone payments and royalties on potential future product sales we may receive. Importantly, these partnerships include predominantly non-target-exclusive licenses for any of our therapeutic platforms, so we maintain the ability to develop therapeutics directed to many high-value targets utilizing our platforms.
There have not been any material changes to the key terms of any of our licensing and collaboration agreements, since December 31, 2021. For further information on the terms and conditions of our existing collaboration and license agreements, please refer to “Item 1. Business - Strategic Partnerships and Collaborations” of our Annual Report on Form 10-K for the year ended December 31, 2021.
Financial Operations Overview
Revenue
Our revenue consists of collaboration revenue, including amounts recognized relating to upfront non-refundable payments for licenses or options to obtain future licenses, research and development funding and milestone payments earned under collaboration and license agreements. We expect that collaboration revenue from our strategic partnerships will be our primary source of revenue for the foreseeable future.
Operating Expenses
Our operating expenses consist primarily of research and development expenses and general and administrative expenses. Personnel costs including salaries, benefits, bonuses and stock-based compensation expense, comprise a significant component of research and development and general and administrative expenses. We allocate certain indirect expenses associated with our facilities, information technology, depreciation and other overhead costs between research and development and general and administrative categories based on employee headcount and the nature of work performed by each employee.
Research and Development Expense
Research and development expenses consist of expenses incurred in performing research and development activities such as conducting clinical trials and preclinical research studies, technical and manufacturing operations, regulatory affairs and other indirect expenses in support of advancing our product candidates and therapeutic platforms. Research and development expenses include third-party program costs, internal personnel costs and other indirect costs as follows:
•fees paid to CROs, consultants, subcontractors and other third-party vendors for work performed for our clinical trials, preclinical studies and regulatory activities;
•fees paid to third-party manufacturers to produce our product candidate supplies;
•amounts paid to vendors and suppliers for laboratory supplies;
•fees, milestone payments and other expenses incurred in connection with license agreements and amendments;
•employee-related expenses such as salaries and benefits and stock-based compensation;
•depreciation of laboratory equipment, computers and leasehold improvements; and
•overhead expenses such as facilities, information technology and other allocated items.
It is difficult to determine with certainty the duration and completion costs of our current or future clinical trials and preclinical programs of our product candidates, or if, when or to what extent we will generate revenue from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of clinical trials and preclinical studies, uncertainties in clinical trial enrollment rates and significant and changing government regulation. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which
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programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate’s commercial potential. Our research and development expenses may increase in the future as we continue to develop our platforms and product candidates.
General and Administrative Expense
General and administrative expenses consist of salaries, benefits and stock-based compensation costs for employees in our executive, finance, legal, intellectual property, business development, human resources and other support functions, as well as legal and professional fees, business insurance, facilities and information technology costs and other expenses. Our general and administrative expenses may increase in the future as we expand our infrastructure to support our ongoing research and development activities.
Other Income (Expense)
Other income (expense) primarily consists of interest income and foreign exchange gain (loss).
Critical Accounting Policies and Significant Judgments and Estimates
Our critical accounting policies are those policies that require the most significant judgments and estimates in the preparation of our interim condensed consolidated financial statements. A summary of our critical accounting policies is presented in note 2 of our annual consolidated financial statements for the year ended December 31, 2021.
Our management’s discussion and analysis of financial condition and results of operations is based on our interim condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these interim condensed consolidated financial statements requires us to make estimates, judgments and assumptions that are inherently uncertain that affect the amounts reported in the interim condensed consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable. We review and evaluate these estimates on an ongoing basis. These assumptions and estimates form the basis for making judgments about the carrying values of assets and liabilities and amounts that have been recorded as revenue and expenses. Actual results and experiences may differ from these estimates. The results of any material revisions would be reflected in the interim condensed consolidated financial statements prospectively from the date of the change in estimate.
There have been no material changes in our critical accounting policies and significant judgments and estimates during the three months ended March 31, 2022 as compared to what has been described in our most recent annual consolidated financial statements.
The full extent to which the COVID-19 pandemic may directly or indirectly impact our business, results of operations and financial condition, including revenues, expenses, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are evolving and highly uncertain, such as the duration and severity of outbreaks, including current and potential future waves or cycles, and the effectiveness of actions taken to contain and treat COVID-19. We considered the potential impact of COVID-19 when making certain estimates and judgments relating to the preparation of our interim condensed consolidated financial statements. While there was no material impact to our interim condensed consolidated financial statements as of and for the three months ended March 31, 2022, our future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in a material impact to our consolidated financial statements in future reporting periods.
Recent Accounting Pronouncements
A summary of recent accounting pronouncements is presented in note 3 of our interim condensed consolidated financial statements for the quarter ended March 31, 2022 within this Quarterly Report on Form 10-Q.
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Results of Operations for the Three Months Ended March 31, 2022 and 2021
Revenue
| Three Months Ended March 31, | Increase/ (Decrease) | ||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Revenue from research and collaborations | $ | 1.9 | $ | 0.6 | $ | 1.3 | 217 | % | |||||||||||||||
Our revenue relates primarily to non-recurring upfront fees, expansion payments or milestone payments from our licensing and collaboration agreements.
Total revenue increased by $1.3 million in the three months ended March 31, 2022 compared to the same period in 2021. Revenue for the three months ended March 31, 2022 included $1.9 million from our partners for research support and other payments. Revenue for the same period in 2021 included $0.6 million from our partners for research support and other payments.
Research and Development Expense
| Three Months Ended March 31, | Increase/ (Decrease) | ||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Third-party research and development program expenses: | |||||||||||||||||||||||
| Clinical development programs: | |||||||||||||||||||||||
| Zanidatamab | $ | 38.6 | $ | 16.6 | $ | 22.0 | 133 | % | |||||||||||||||
| ZW49 | 1.6 | 4.4 | (2.8) | (64) | % | ||||||||||||||||||
| Preclinical and other research programs | 0.5 | 3.4 | (2.9) | (85) | % | ||||||||||||||||||
| 40.7 | 24.4 | 16.3 | 67 | % | |||||||||||||||||||
| Unallocated departmental research and development expenses: | |||||||||||||||||||||||
| Salaries and benefits | 18.3 | 13.1 | 5.2 | 40 | % | ||||||||||||||||||
| Stock-based compensation (recovery) expense | (3.2) | 1.8 | (5.0) | (278) | % | ||||||||||||||||||
| Other unallocated expenses | 6.7 | 5.0 | 1.7 | 34 | % | ||||||||||||||||||
| Research and development expense | $ | 62.5 | $ | 44.3 | $ | 18.2 | 41 | % | |||||||||||||||
Research and development expense increased by $18.2 million in the three months ended March 31, 2022 compared to the same period in 2021. For the three months ended March 31, 2022, research and development expense included non-cash stock-based compensation recovery of $3.2 million comprised of a $2.7 million recovery from equity classified awards (three months ended March 31, 2021 – $4.3 million expense) and a $0.5 million recovery related to the non-cash mark-to-market revaluation of certain historical liability classified awards (three months ended March 31, 2021 - recovery of $2.5 million). Excluding stock-based compensation expense, research and development expense increased by $23.2 million or 55% in 2022 compared to 2021. The increase related primarily to higher clinical trial expenses for zanidatamab, increased drug manufacturing expenses, severance and other expenses incurred due to the Company's Restructuring program, partly offset by lower clinical trial expense for ZW49.
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General and Administrative Expense
| Three Months Ended March 31, | Increase/ (Decrease) | ||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Salaries and benefits | $ | 7.9 | $ | 6.5 | $ | 1.4 | 22 | % | |||||||||||||||
| Stock-based compensation recovery | (5.1) | (8.8) | 3.7 | 42 | % | ||||||||||||||||||
| Professional fees, consulting and business insurance | 3.7 | 3.1 | 0.6 | 19 | % | ||||||||||||||||||
| Other general and administrative expenses | 5.6 | 0.5 | 5.1 | 1,020 | % | ||||||||||||||||||
| General and administrative expense | $ | 12.1 | $ | 1.3 | $ | 10.8 | 831 | % | |||||||||||||||
General and administrative expense increased by $10.8 million for the three months ended March 31, 2022 compared to the same period in 2021. For the three months ended March 31, 2022, general and administrative expense included non-cash stock-based compensation recovery of $5.1 million comprised of a $2.2 million recovery from equity classified awards (three months ended March 31, 2021 – $4.2 million expense) and a $2.9 million recovery related to the non-cash mark-to-market revaluation of certain historical liability classified awards (three months ended March 31, 2021 – recovery of $13.0 million). Excluding stock-based compensation, general and administrative expense increased by $7.1 million or 70% in 2022 compared to 2021. This increase was primarily due to severance and other expenses incurred due to the Company's Restructuring program in 2022 as well as a non-recurring sales tax refund recognized in 2021, which partially offset expenses in the same period in 2021.
Other Income (Expense), net
| Three Months Ended March 31, | Increase/ (Decrease) | ||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Other income, net | $ | — | $ | 0.9 | $ | (0.9) | (100) | % | |||||||||||||||
Other income, net decreased by $0.9 million for the three months ended March 31, 2022 compared to the same period in 2021. Other income, net for 2022 included primarily $0.3 million in interest income and $0.3 million in foreign exchange loss and other miscellaneous amounts. Other income, net for the three months ended March 31, 2021 primarily included $0.7 million in interest income and a $0.1 million net foreign exchange loss and other miscellaneous amounts.
Liquidity and Capital Resources
Sources of Liquidity
Since our IPO in 2017, we have funded our operations primarily through follow-on public offerings, including the issuance of pre-funded warrants, as well as from upfront fees, milestone payments, and research support payments generated from our strategic collaborations and licensing agreements.
On January 31, 2022, we completed a public offering pursuant to which we sold (i) 11,035,000 common shares (including the sale of 1,875,000 common shares to the underwriters upon their full exercise of their over-allotment option), at $8.00 per common share and 3,340,000 pre-funded warrants in lieu of common shares at $7.9999 per pre-funded warrant. We received gross proceeds of $115.0 million and net proceeds were approximately $107.7 million, after underwriting discounts, commissions and estimated offering expenses.
On October 1, 2021, we amended our Open Market Sale AgreementSM, dated as of November 5, 2019 (as amended, the “Sales Agreement”), with Jefferies LLC (“Jefferies”). The Sales Agreement provides for the offer and sale of our common shares from time to time through Jefferies as our sales agent, subject to the maximum aggregate dollar amount registered pursuant to the applicable prospectus supplement. Sales of common shares through Jefferies, if any, will be made by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act. No shares of our common stock were sold under the Sales Agreement since its inception to date.
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As of March 31, 2022, we had $300.5 million in cash resources consisting of cash, cash equivalents and short-term investments.
Cash Flows
The following table represents a summary of our cash flows for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in millions) | |||||||||||
| Net cash (used in) provided by: | |||||||||||
| Operating activities | $ | (55.4) | $ | (40.8) | |||||||
| Investing activities | 20.6 | 76.8 | |||||||||
| Financing activities | 108.6 | 2.1 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (0.1) | (0.2) | |||||||||
| Net change in cash and cash equivalents | $ | 73.7 | $ | 37.9 | |||||||
Operating Activities
During the three months ended March 31, 2022, cash used in operating activities was $55.4 million compared to $40.8 million for the same period in the prior year. The increase in net cash used in operating activities was primarily due to higher clinical trial expenses for zanidatamab and increased drug manufacturing expenses as well as, severance and other expenses incurred due to the Company's Restructuring program, partly offset by lower clinical trial expense for ZW49 and deprioritized research projects.
Investing Activities
Net cash provided by investing activities for the three month period ended March 31, 2022 was primarily related to redemptions of short-term investments in marketable securities of $25.3 million partially offset by cash outflows of $4.7 million for the acquisition of property and equipment in relation to our new office and lab spaces in Canada and an increase in intangible assets including software implementation costs. Net cash provided by investing activities for the three month period ended March 31, 2021 was primarily related to redemptions of short-term investments in marketable securities of $77.5 million partially offset by cash outflows of $0.7 million for the acquisition of property and equipment.
Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2022 included $107.7 million relating to net proceeds from our January 2022 public offering of equity securities and $0.9 million from the issuance of common shares in relation to our employee stock purchase plan. Net cash provided by financing activities for the three months ended March 31, 2021 included net proceeds of $1.3 million from stock option exercises and $0.8 million from the issuance of common shares in relation to our employee stock purchase plan.
Funding Requirements
We have not generated any revenue from approved product sales to date and do not expect to do so until such time as we obtain regulatory approval and commercialize one or more of our product candidates. As we are currently in the clinical and preclinical stages of development, it will be some time before we expect to achieve this, and it is uncertain that we ever will. We expect that we will continue to increase our operating expenses in connection with ongoing clinical trials and preclinical activities and the development of product candidates in our pipeline. In addition, inflation generally may affect us by increasing our cost of labor and clinical trial expenses. Our funding requirements in the short-term and long-term will consist of the operational, capital, and manufacturing expenditures, a portion of which contain contractual or other obligations including future minimum lease payments under non-cancelable operating leases as presented in note 11 and other commitments and contingencies as presented in note 13 to the interim condensed consolidated financial statements. Because of the inherent risks and uncertainties associated with the development and commercialization of our drug candidates, we are unable to estimate the amounts of capital outflows and operating expenditures associated with our current and anticipated clinical trials and preclinical studies.
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Although it is difficult to predict our funding requirements, based on our current operating plan, we anticipate that our existing cash and cash equivalents and short-term investments combined with certain anticipated milestone payments from our existing collaborations will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months from the date this Quarterly Report on Form 10-Q is filed with the SEC. We have based these estimates on assumptions and plans which may change and which could impact the magnitude and/or timing of operating expenses, capital expenditures and our cash runway. These estimates include future milestone payments which are dependent upon the successful completion of specified research and development activities by us and our collaborators and are therefore uncertain at this time. The successful development of our product candidates and the achievement of milestones by our strategic partners is uncertain, and therefore we are unable to estimate the actual funds we will require to complete the research, development and commercialization of product candidates. See Part II, Item 1A, “Risk Factors - Risks Related to Our Business and the Development and Commercialization of Our Product Candidates” and “Risk Factors - Risks Related to Our Dependence on Third Parties - We may not realize the anticipated benefits of our strategic partnerships”.
We will need substantial additional funding to support our continuing operations and pursue our long-term business plans. Accordingly, our future funding requirements will depend on many factors, including but not limited to:
•the scope, rate of progress, results and costs of our clinical trials, preclinical studies and other related activities;
•our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements as well as our ability to enter into new arrangements;
•the timing and the costs of obtaining regulatory approvals for any of our current or future drug candidates;
•the cost of commercialization activities if any of our current or future drug candidates are approved for sale, including marketing, sales and distribution costs; and
•the amount of revenue, if any, received from commercial sales of our drug candidates, should any of our drug candidates receive marketing approval.
If adequate funds are not available at favorable terms, we may be required to reduce operating expenses, delay or reduce the scope of our product development and commercial expansion programs, obtain funds through arrangements with others that may require us to relinquish rights to certain of our technologies or products that we would otherwise seek to develop or commercialize ourselves or cease operations. If we do raise additional capital through public or private equity or convertible debt offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. A deterioration in the equity or credit markets may make any necessary debt or equity financing more difficult, more costly and more dilutive.
Segment Reporting
We view our operations and manage our business in one segment, which is the development of next-generation multifunctional biotherapeutics.
Outstanding Share Data
As of May 2, 2022, our authorized share capital consisted of an unlimited number of common shares, each without par value, of which 57,771,204 were issued and outstanding, and an unlimited number of preferred shares, each without par value, none of which were issued and outstanding. As of May 2, 2022, we had 8,581,961 common shares issuable pursuant to 8,581,961 pre-funded warrants, 4,023,868 common shares issuable pursuant to 4,023,868 exercisable outstanding stock options and 4,709,137 common shares issuable pursuant to 4,709,137 outstanding options that were not exercisable at that date and 203,733 outstanding restricted stock units.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to market risks in the ordinary course of our business that may affect our results of operations, cash flows and fair values of assets and liabilities, including interest rate movements, volatility in foreign currency exchange rates, and changes in
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economic conditions as a result of the COVID-19 pandemic. The primary market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates and foreign exchange rates.
Interest Rate Risk
Our exposure to interest rate risk relates primarily to our cash, cash equivalent and short-term investments. At March 31, 2022 and December 31, 2021, we had cash, cash equivalents and short-term investments of $300.5 million and $252.6 million, respectively, consisting primarily of funds in cash, guaranteed investment certificates and term deposits. The primary objective of our investment activities is to preserve principal while also maintaining liquidity and maximizing investment returns without significantly increasing risk. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of our investment portfolio, a hypothetical 10% increase or decrease in interest rates or in investment returns would not have a material effect on the fair market value of our portfolio or investment income. Our investment portfolio is primarily composed of short-term investments with maturities less than 12 months and our long term investments in debt securities are held to maturity. Accordingly, we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.
Foreign Currency Exchange Risk
Our functional currency is the U.S. dollar as most of our revenues and operating expenses are denominated in U.S. dollars. We incur certain operating expenses in Canadian dollars and other foreign currencies and accordingly, are subject to foreign currency transaction risk. We do not use derivative instruments to hedge exposure to foreign currency transaction risk due to the low volume of transactions denominated in Canadian dollars and other foreign currencies. We do not anticipate that foreign currency transaction gains or losses will be significant at our current level of operations.
At March 31, 2022, our net monetary assets denominated in Canadian dollars were $0.3 million (C$0.5 million). We are subject to foreign currency translation risk when translating these foreign currency denominated net monetary assets to U.S. dollars for period end financial statement preparation. The fluctuation of the Canadian dollar relative to the U.S. dollar will have an impact on the reported balances for net assets, net loss and shareholders’ equity in our interim condensed consolidated financial statements. A hypothetical 10% increase (decrease) in the value of the Canadian dollar relative to the U.S. dollar would result in a nominal foreign exchange gain (loss) in our Condensed Consolidated Statement of Loss and Comprehensive Loss for the three months ended March 31, 2022.
Inflation Risk
Inflation generally may affect us by increasing our cost of labor and clinical trial expenses. We do not believe that inflation and changing prices had a material impact on our business, financial condition, or results of operations for any of the periods presented herein.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the design and operating effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Any such information is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
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. Based on our evaluation of our disclosure controls and procedures as of March 31, 2022, our Chief Executive Officer and our Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were, in design and operation, effective at the reasonable assurance level.
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Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. As of March 31, 2022, we are not a party to any legal proceedings that, in the opinion of our management, would reasonably be expected to have a material adverse effect on our business, financial condition, operating results or cash flows if determined adversely to us. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item 1A. Risk Factors
You should carefully consider the following risk factors, in addition to the other information contained in this Quarterly Report on Form 10-Q, including our interim condensed consolidated financial statements and related notes. If any of the events described in the following risk factors occurs, our business, operating results and financial condition could be seriously harmed. This Quarterly Report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this Quarterly Report on Form 10-Q. See “Cautionary Note Regarding Forward-Looking Statements.” The risks below are not the only risks facing our company. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, results of operations, and/or prospects. Our Risk Factors are not guarantees that no such conditions exist as of the date of this report and should not be interpreted as an affirmative statement that such risks or conditions have not materialized, in whole or in part.
Summary of Risk Factors
Below is a summary of the principal factors that make an investment in our common shares speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this Form 10-Q and our other filings with the SEC, before making an investment decision regarding our common shares.
•We have a limited number of product candidates, all which are still in clinical development. If we do not obtain regulatory approval of one or more of our product candidates, or experience significant delays in doing so, our business will be materially adversely affected.
•Clinical trials are expensive, time consuming, difficult to design and implement, and involve uncertain outcomes. Furthermore, the results of previous preclinical studies and clinical trials may not be predictive of future results, and the results of our current and planned clinical trials may not satisfy the requirements of the FDA or comparable regulatory authorities outside the United States.
•Our business has been and may continue to be adversely affected by the COVID-19 pandemic.
•Our product candidates may have undesirable side effects that may delay or prevent marketing approval or, if approval is received, require them to be taken off the market, require them to include safety warnings or otherwise limit their sales; no regulatory agency has made any determination that any of our product candidates are safe or effective for use by the general public for any indication.
•We face significant competition, and if our competitors develop and market products that are more effective, safer or less expensive than our product candidates, our commercial opportunities will be negatively impacted.
•If any of our product candidates receive regulatory approval, the approved products may not achieve broad market acceptance among physicians, patients, the medical community and third-party payors, in which case revenue generated from their sales would be limited.
•Reimbursement decisions by third-party payors may have an adverse effect on pricing and market acceptance. If there is not sufficient reimbursement for our products, it is less likely that our products will be widely used.
•We may not be successful in our efforts to use our therapeutic platforms to build a pipeline of product candidates.
•If any product liability lawsuits are successfully brought against us or any of our strategic partners, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.
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•Security breaches and incidents, loss of data and other disruptions could compromise sensitive information related to our business or protected health information or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.
•Current and future legislation may increase the difficulty and cost for us to commercialize any products that we or our strategic partners develop and affect the prices we may obtain.
•We have incurred significant losses since inception and anticipate that we will continue to incur losses for the foreseeable future. We have no products approved for commercial sale, and to date we have not generated any revenue or profit from product sales. We may never achieve or sustain profitability.
•We will require substantial additional funding, which may not be available to us on acceptable terms, or at all, and, if not available, may require us to delay, scale back, or cease our product development programs or operations.
•Our existing strategic partnerships are important to our business, and future strategic partnerships will likely also be important to us. If we are unable to maintain our strategic partnerships, or if these strategic partnerships are not successful, our business could be adversely affected.
•We rely on third-party manufacturers to produce our product candidates and on other third parties to provide supplies and store, monitor and transport bulk drug substance and drug product. We and our third-party partners may encounter difficulties with respect to these activities that could delay or impair our ability to initiate or complete our clinical trials or commercialize approved products.
•We rely on third parties to monitor, support, conduct and oversee clinical trials of the product candidates that we are developing and, in some cases, to maintain regulatory files for those product candidates. We may not be able to obtain regulatory approval for our product candidates or commercialize any products that may result from our development efforts if we are not able to maintain or secure agreements with such third parties on acceptable terms, if these third parties do not perform their services as required, or if these third parties fail to timely transfer any regulatory information held by them to us.
•We rely on third parties for various operational and administrative aspects of our business, including for certain cloud-based software platforms, which impact our financial, operational and research activities. If any of these third parties fail to provide timely, accurate and ongoing service or if the cloud-based platforms suffer outages that we are unable to mitigate, our business may be adversely affected.
•Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties.
•If we are unable to obtain, maintain and enforce patent and trade secret protection for our product candidates and related technology, our business could be materially harmed.
•We may become involved in lawsuits to protect or enforce our patents and trade secrets, which could be expensive, time consuming and unsuccessful.
•If we are unable to protect the confidentiality of our proprietary information, the value of our technology and products could be adversely affected.
•Our share price is likely to be volatile and the market price of our common shares may drop below the price paid by shareholders.
•We are governed by the corporate laws of Canada, which in some cases have a different effect on shareholders than the corporate laws of the United States.
•U.S. civil liabilities may not be enforceable against us, our directors, our officers or certain experts named in our Annual Report on Form 10-K.
•Our principal shareholders, in aggregate, could exert substantial control over us which could delay or prevent a change in corporate control or result in the entrenchment of management or the board of directors.
•Provisions in our corporate charter documents and Canadian law could make an acquisition of us, which may be beneficial to our shareholders, more difficult and may prevent attempts by our shareholders to replace or remove our current management and/or limit the market price of our common shares.
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Risk Factors
Risks Related to Our Business and the Development and Commercialization of Our Product Candidates
We have a limited number of product candidates, all which are still in clinical development. If we do not obtain regulatory approval of one or more of our product candidates, or experience significant delays in doing so, our business will be materially adversely affected.
We currently have no products approved for sale or marketing in any country, and may never be able to obtain regulatory approval for any of our product candidates. As a result, we are not currently permitted to market any of our product candidates in the United States or in any other country until we obtain regulatory approval from the FDA or comparable regulatory authorities outside the United States. Our product candidates are in clinical development and we have not submitted an application, or received marketing approval, for any of our product candidates. Obtaining regulatory approval of our product candidates will depend on many factors, including:
•completing clinical trials that demonstrate the efficacy and safety of our product candidates;
•preparation and submission to the appropriate regulatory authorities of an application for marketing approval that includes substantial evidence of safety, purity and potency from results of nonclinical testing and clinical trials;
•establishing and maintaining adequate commercial manufacturing arrangements or establishing our own commercial manufacturing capabilities or reliable arrangements with third-party contract manufacturers;
•potential pre-approval audits of nonclinical sites, clinical trial sites, and third-party manufacturing sites that generated the data and product in support of the marketing application; and
•launching commercial sales, marketing and distribution operations.
Many of these factors are wholly or partially beyond our control, including clinical advancement, the regulatory submission process and changes in the competitive landscape. If we do not achieve one or more of these factors in a timely manner, we could experience significant delays or an inability to develop our product candidates at all.
Clinical trials are expensive, time consuming, difficult to design and implement, and involve uncertain outcomes. Furthermore, the results of previous preclinical studies and clinical trials may not be predictive of future results, and the results of our current and planned clinical trials may not satisfy the requirements of the FDA or comparable regulatory authorities outside the United States.