SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
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)
British Columbia, Canada
|(State or other jurisdiction of|
incorporation or organization)
Suite 800—114 East 4th Avenue
Vancouver, BC V5T 1G4
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
(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
Name of each exchange on which registered
Common Shares, no par value per share
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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 August 2, 2022 was 57,892,785.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 2022
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;
•the impact of the COVID-19 pandemic on our business and operations; and
•the timing, completion, expected benefits and other impacts of our proposed transaction to become a Delaware corporation (the “Redomicile Transactions”).
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;
•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;
•expected benefits of the Redomicile Transactions may not materialize as expected or at all;
•failure to obtain required security holder approvals, or regulatory, stock exchange or other third party approvals for our proposed Redomicile Transactions or the failure of the Redomicile Transactions to be completed for any other reason (or to be completed in a timely manner);
•unanticipated tax consequences in connection with the Redomicile Transactions;
•negative publicity resulting from the Redomicile Transactions and its potential effect on our business and market price of our common shares;
•costs related to the Redomicile Transactions could be greater than expected;
•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;
•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;
•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;
•our election to rely on reduced reporting and disclosure requirements available to smaller reporting companies may make our common shares less attractive to investors;
•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$” are to Canadian dollars.
Except as otherwise indicated, references in this Quarterly Report on Form 10-Q to “Zymeworks,” the “Company,” “we,” “us” and “our” refer to Zymeworks Inc. and its subsidiaries.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Index to Interim Condensed Consolidated Financial Statements (unaudited)
As of and for the three and six months ended June 30, 2022
Condensed Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars except share data)
|Cash and cash equivalents||$||198,649 ||$||201,867 |
|Short-term investments (note 5)||43,184 ||50,741 |
|Accounts receivable||4,196 ||15,614 |
|Prepaid expenses and other current assets||17,037 ||19,998 |
|Total current assets||263,066 ||288,220 |
|Deferred financing fees||1,290 ||1,214 |
|Long-term investments (note 5)||886 ||886 |
|Long-term prepaid assets||16,078 ||12,490 |
|Deferred tax asset ||2,613 ||3,070 |
|Property and equipment, net ||26,157 ||22,783 |
|Operating lease right-of-use assets||23,321 ||26,987 |
|Intangible assets, net ||5,913 ||3,838 |
|Acquired in-process research and development (note 6)||17,628 ||17,628 |
|Goodwill (note 6) ||12,016 ||12,016 |
|Total assets||$||368,968 ||$||389,132 |
|Liabilities and shareholders’ equity|
|Accounts payable and accrued liabilities (note 7)||$||76,685 ||$||62,767 |
|Fair value of liability classified stock options||679 ||7,754 |
|Current portion of operating lease liability (note 11)||2,725 ||1,310 |
|Other current liabilities ||— ||22 |
|Total current liabilities||80,089 ||71,853 |
|Long-term portion of operating lease liability (note 11)||29,170 ||30,923 |
|Deferred revenue (note 9)||32,941 ||32,941 |
|Other long-term liabilities (note 7)||2,900 ||2,748 |
|Deferred tax liability ||1,586 ||1,573 |
|Total liabilities||146,686 ||140,038 |
Common shares, no par value; unlimited authorized shares at June 30, 2022 and December 31, 2021, respectively; 57,772,461 and 46,633,935 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively (note 8)
|826,497 ||741,147 |
|Additional paid-in capital||222,792 ||197,710 |
|Accumulated other comprehensive loss||(6,659)||(6,659)|
|Total shareholders’ equity||222,282 ||249,094 |
|Total liabilities and shareholders’ equity||$||368,968 ||$||389,132 |
|Research collaboration and licensing agreements (note 9)|
|Commitments and contingencies (note 13)|
The accompanying notes are an integral part of these financial statements
Condensed Consolidated Statements of Loss and Comprehensive Loss
(Expressed in thousands of U.S. dollars except share and per share data)
|Three Months Ended June 30,||Six Months Ended June 30,|
|Research and development collaborations (note 9)||$||5,442 ||$||1,771 ||$||7,358 ||$||2,415 |
|Research and development||56,022 ||50,711 ||118,532 ||94,994 |
|General and administrative||15,243 ||19,945 ||27,335 ||21,241 |
|Total operating expenses||71,265 ||70,656 ||145,867 ||116,235 |
|Loss from operations||(65,823)||(68,885)||(138,509)||(113,820)|
|Interest income||436 ||588 ||738 ||1,329 |
|Other income, net (note 10)||759 ||341 ||444 ||470 |
|Total other income, net||1,195 ||929 ||1,182 ||1,799 |
|Loss before income taxes||(64,628)||(67,956)||(137,327)||(112,021)|
|Income tax recovery (expense)||9 ||434 ||83 ||(91)|
|Net loss and comprehensive loss||$||(64,619)||$||(67,522)||$||(137,244)||$||(112,112)|
|Net loss per common share (note 4):|
|Weighted-average common shares outstanding (note 4):|
|Basic||66,353,279 ||51,422,066 ||63,874,097 ||51,395,015 |
|Diluted||66,354,784 ||51,422,066 ||63,880,076 ||52,068,506 |
The accompanying notes are an integral part of these financial statements
Condensed Consolidated Statement of Changes in Shareholders’ Equity
(Expressed in thousands of U.S. dollars except share data)
|Balance at January 1, 2022||46,633,935 ||$||741,147 ||$||(683,104)||$||(6,659)||$||197,710 ||$||249,094 |
|Issuance of common shares on exercise of options||2,112 ||20 ||— ||— ||(8)||12 |
|Issuance of common shares through employee stock purchase plan||61,801 ||1,361 ||— ||— ||— ||1,361 |
Issuance of common shares upon vesting of restricted stock units (“RSUs”)
|37,398 ||1,382 ||— ||— ||(1,382)||— |
|Stock-based compensation (recovery)||— ||— ||— ||— ||(2,932)||(2,932)|
|Issuance of common shares and pre-funded warrants in connection with public offering, net of offering costs (notes 8a and 8d)||11,035,000 ||82,549 ||— ||— ||24,985 ||107,534 |
|Net loss||— ||— ||(72,625)||— ||— ||(72,625)|
|Balance at March 31, 2022||57,770,246 ||$||826,459 ||$||(755,729)||$||(6,659)||$||218,373 ||$||282,444 |
|Issuance of common shares on exercise of options||1,257 ||11 ||— ||— ||(4)||7 |
|Issuance of common shares upon vesting of RSUs||958 ||27 ||— ||— ||(27)||— |
|Stock-based compensation expense||— ||— ||— ||— ||4,450 ||4,450 |
|Net loss||— ||— ||(64,619)||— ||— ||(64,619)|
|Balance at June 30, 2022||57,772,461 ||$||826,497 ||$||(820,348)||$||(6,659)||$||222,792 ||$||222,282 |
|Balance at January 1, 2021||46,035,389 ||$||724,219 ||$||(471,261)||$||(6,659)||$||163,623 ||$||409,922 |
|Issuance of common shares on exercise of options||78,736 ||2,624 ||— ||— ||(662)||1,962 |
|Issuance of common shares through employee stock purchase plan||26,807 ||1,321 ||— ||— ||— ||1,321 |
|Issuance of common shares upon vesting of restricted stock units RSUs||23,956 ||843 ||— ||— ||(843)||— |
|Stock-based compensation expense||— ||— ||— ||— ||8,530 ||8,530 |
|Net loss||— ||— ||(44,590)||— ||— ||(44,590)|
|Balance at March 31, 2021||46,164,888 ||$||729,007 ||$||(515,851)||$||(6,659)||$||170,648 ||$||377,145 |
|Issuance of common shares on exercise of options||67,583 ||$||1,218 ||$||— ||$||— ||$||(455)||$||763 |
|Issuance of common shares upon vesting of RSUs||2,266 ||86 ||— ||— ||(86)||— |
|Stock-based compensation expense||— ||— ||— ||— ||11,086 ||11,086 |
|Net loss||— ||— ||(67,522)||— ||(67,522)|
|Balance at June 30, 2021||46,234,737 ||$||730,311 ||$||(583,373)||$||(6,659)||$||181,193 ||$||321,472 |
The accompanying notes are an integral part of these financial statements
Condensed Consolidated Statements of Cash Flows
(Expressed in thousands of U.S. dollars)
|Six Months Ended June 30,|
|Cash flows from operating activities:|
|Items not involving cash:|
|Depreciation of property and equipment||3,683 ||1,945 |
|Amortization of intangible assets||320 ||2,180 |
|Stock-based compensation (recovery) expense||(5,282)||6,400 |
|Amortization of operating lease right-of-use assets||3,500 ||1,255 |
|Deferred income tax expense (recovery)||470 ||(405)|
|Change in fair value of contingent consideration liability||(250)||31 |
|Change in fair value of investments in equity instruments||— ||(167)|
|Unrealized foreign exchange (gain) loss ||(434)||921 |
|Changes in non-cash operating working capital:|
|Accounts receivable||11,476 ||6,133 |
|Prepaid expenses and other current assets||(127)||(10,000)|
|Accounts payable and accrued liabilities||13,550 ||10,339 |
|Operating lease liabilities||102 ||2,325 |
|Net cash used in operating activities||(110,236)||(91,155)|
|Cash flows from financing activities:|
|Proceeds from public offering, net of issuance costs (notes 8a, 8d)||107,534 ||— |
|Issuance of common shares on exercise of stock options (note 8f)||19 ||2,084 |
|Issuance of common shares through employee stock purchase plan||863 ||829 |
|Deferred financing fees||(76)||(128)|
|Finance lease payments||(9)||(8)|
|Net cash provided by financing activities||108,331 ||2,777 |
|Cash flows from investing activities:|
|Net redemptions of short-term investments||7,094 ||106,573 |
|Acquisition of property and equipment||(6,821)||(2,447)|
|Acquisition of intangible assets||(1,629)||(40)|
|Net cash (used in) provided by investing activities||(1,356)||104,086 |
|Effect of exchange rate changes on cash and cash equivalents||43 ||(585)|
|Net change in cash and cash equivalents||(3,218)||15,123 |
|Cash and cash equivalents, beginning of period||201,867 ||242,036 |
|Cash and cash equivalents, end of period||$||198,649 ||$||257,159 |
|Supplemental disclosure of non-cash investing and financing items:|
|Leased assets obtained in exchange for operating lease liabilities||$||72 ||$||21,279 |
|Acquisition of property and equipment in accounts payable and accrued liabilities||1,003 ||1,281 |
The accompanying notes are an integral part of these financial statements
Notes to the Interim Condensed Consolidated Financial Statements
(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 and six months ended June 30, 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
condensed consolidated financial statements as of and for the three and six months ended June 30, 2022, the Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in a material impact to the Company’s consolidated financial statements in future reporting periods.
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
Net loss per share for the three and six months ended June 30, 2022 and 2021 was as follows:
|Three Months Ended|
|Six Months Ended|
|Net loss attributable to common shareholders:|
|Adjustment for change in fair value of liability classified stock options||(2)||— ||(199)||(13,732)|
|Weighted-average common shares outstanding:|
|Basic||66,353,279 ||51,422,066 ||63,874,097 ||51,395,015 |
|Adjustment for dilutive effect of liability classified stock options||1,505 ||— ||5,979 ||673,491 |
|Diluted||66,354,784 ||51,422,066 ||63,880,076 ||52,068,506 |
|Net loss per common share – basic||$||(0.97)||$||(1.31)||$||(2.15)||$||(2.18)|
|Net loss per common share – diluted||$||(0.97)||$||(1.31)||$||(2.15)||$||(2.42)|
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.
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 at June 30, 2022 consist of equity securities of $886 acquired for strategic purposes or in connection with licensing and collaboration agreements (December 31, 2021 - $886). Long-term investments are accounted for as available for sale financial instruments with changes in fair value recorded through net income.
6. IPR&D and Goodwill
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 $17,628 at both June 30, 2022 and December 31, 2021. The Company concluded that there were no impairment indicators related to IPR&D as of June 30, 2022.
The Company performed its most recent annual impairment test of goodwill as of December 31, 2021. As part of the evaluation of the recoverability of goodwill, the Company identified only one reporting unit to which the total carrying amount of goodwill has been assigned. As at December 31, 2021, the Company performed a qualitative assessment for its annual impairment test of goodwill after concluding that it was not more likely than not that the fair value of the reporting unit was less than its carrying value. Consequently, a quantitative impairment test was not required. The Company concluded that there were no impairment indicators related to goodwill as of June 30, 2022.
Accounts payable and accrued expenses consisted of the following:
|Trade payables||$||5,889 ||$||5,174 |
|Accrued research and development expenses||56,983 ||50,963 |
|Employee compensation and vacation accruals||8,292 ||3,346 |
|Accrued legal and professional fees||2,167 ||1,064 |
|Other||3,354 ||2,220 |
|Total||$||76,685 ||$||62,767 |Other long-term liabilities consisted of the following:
|Liability for contingent consideration (note 12)||$||1,248 ||$||1,498 |
|Liability from in-licensing agreements||850 ||1,150 |
|113 ||100 |
|Other||689 ||— |
|Total||$||2,900 ||$||2,748 |
8. Shareholders’ Equity
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.
The Company has an unlimited authorized number of voting common shares, preferred shares and Series A Participating Preferred Shares, all without par value.
As of June 30, 2022 and December 31, 2021, no preferred shares were issued or outstanding, respectively.
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.Adoption of a Shareholder Rights Plan
On June 9, 2022, the board of directors authorized and declared a dividend distribution of one right (each, a “Right”) for each outstanding common share of the Company to shareholders of record as of the close of business on June 21, 2022. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Share, of the Company, at an exercise price of $74.00, subject to adjustment. The complete terms of the Rights are set forth in a Preferred Shares Rights Agreement (the “Rights Plan”), dated as of June 9, 2022, between the Company and Computershare Trust Company, N.A., as rights agent.
In general terms, the Rights Plan works by imposing a significant penalty upon any person or group that acquires 10 percent or more (or 20 percent or more in the case of certain institutional investors who report their holdings on Schedule 13G) of the common shares without the approval of the board of directors. As a result, the overall effect of the Rights Plan and the issuance of the Rights may be to render more difficult or discourage a merger, amalgamation, arrangement, take-over bid, tender or exchange offer or other business combination involving the Company that is not approved by the board of directors. However, neither the Rights Plan nor the Rights should interfere with any merger, amalgamation, arrangement, take-over bid, tender or exchange offer or other business combination approved by the board of directors. The issuance of Rights does not affect reported earnings per share.
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 initial public offering (“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 outstanding shares on the last day of the immediately preceding calendar year. As of June 30, 2022, 2,834,664 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, board of directors 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. As of June 30, 2022, 250,000 common shares were available for future award grants under this plan.
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-|
date fair value
|Outstanding, December 31, 2021||354,269 ||25.85 |
|Granted||10,400 ||7.55 |
|Vested and settled||(38,356)||27.00 |
|Outstanding, June 30, 2022||187,683 ||21.76 |
As of June 30, 2022, there was $1,890 of unamortized RSU expense that will be recognized over a weighted average period of 1.18 years.
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.
The following table summarizes the Company’s stock options granted in Canadian dollars under the Original Plan and the New Plan:
|Outstanding, December 31, 2021||2,488,655 ||26.15 ||20.70 ||6.24||7,919 ||6,224 |
|Granted||838,035 ||8.78 ||6.88 |
|Exercised||(3,369)||7.30 ||5.78 |
|Forfeited||(852,789)||27.48 ||21.60 |
|Outstanding, June 30, 2022||2,470,532 ||19.83 ||15.40 ||6.65||— ||— |The following table summarizes the Company’s stock options granted in U.S. dollars under the New Plan:
|Outstanding, December 31, 2021||4,916,914 ||26.59 ||7.93||5,555 |
|Granted||2,484,248 ||8.59 |
|Exercised||— ||— |
|Outstanding, June 30, 2022||5,543,223 ||18.18 ||8.58||— |
During the six months ended June 30, 2022, the Company received cash proceeds of $19 from stock options exercised.
The stock options outstanding at June 30, 2022 expire at various dates from July 1, 2022 to June 9, 2032.
The estimated fair values of options granted to officers, directors, employees and consultants are amortized over the relevant vesting periods. Stock-based compensation expense for equity classified instruments, as well as the financial statement impact of the amortization and periodic revaluation of liability classified instruments, are recorded in research and development expense, general and administration expense and finance expense as follows:
|Three Months Ended June 30,||Six Months Ended June 30,|
|Research and development expense:|
|Stock-based compensation expense (recovery) for equity classified instruments||$||1,971 ||$||5,790 ||$||(776)||$||10,126 |
|Change in fair value of liability classified instruments||(300)||245 ||(774)||(2,268)|
|$||1,671 ||$||6,035 ||$||(1,550)||$||7,858 |
|General and administrative expense:|
|Stock-based compensation expense (recovery) for equity classified instruments||$||1,281 ||$||5,296 ||$||(951)||$||9,488 |
|Change in fair value of liability classified instruments||(163)||1,545 ||(3,039)||(11,406)|
|$||1,118 ||$||6,841 ||$||(3,990)||$||(1,918)|
|Finance expense (income):|
|Change in fair value of liability classified instruments||(2)||8 ||(32)||(58)|
Amounts for equity classified instruments above include stock-based compensation expense relating to RSUs of $477 and recovery of $126 for the three and six months ended June 30, 2022 (2021: $718 and $1,324).
The estimated fair value of stock options granted under the New Plan was determined using the Black-Scholes option pricing model with the following weighted-average assumptions:
|Six Months Ended June 30,|
|Dividend yield||0 ||%||0 ||%|
|Expected volatility||77.3 ||%||80.9 ||%|
|Risk-free interest rate||1.89 ||%||0.98 ||%|
|Expected average life of options||5.94 years||6.05 years|
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.
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.
The weighted-average Black-Scholes option pricing assumptions for liability classified stock options outstanding at June 30, 2022 and 2021 are as follows:
|0 ||%||0 ||%|
|73.3 ||%||75.9 ||%|
Risk-free interest rate
|3.09 ||%||0.59 ||%|
Expected average option term
|2.01 years||2.53 years|
Number of liability classified stock options outstanding
At June 30, 2022, the unamortized compensation expense related to unvested options was $22,480. The remaining unamortized compensation expense as of June 30, 2022 will be recognized over a weighted-average period of 1.66 years.
g.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 and six months ended June 30, 2022, the Company recorded compensation expense of $107 and $290 (2021: $249 and $518) in research and development expense and general and administrative expense accounts. As of June 30, 2022, the total amount contributed by ESPP participants and not yet settled is $739 (December 31, 2021: $1,243).
9. Research, Collaboration and Licensing Agreements
Revenue recognized from the Company’s strategic partnerships is summarized as follows:
|Three Months Ended|
|Six Months Ended|
Atreca, Inc. (“Atreca”)
|Research license fee relating to licensing agreement||$||5,000 ||$||— ||$||5,000 ||$||— |
|Research support and other payments||442 ||1,771 ||2,358 ||2,415 |
|$||5,442 ||$||1,771 ||$||7,358 ||$||2,415 |
Since December 31, 2021, there have not been any material changes to the key terms of our collaboration and license agreements with the exception of a new licensing agreement with Atreca as described below. 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.
In April 2022, the Company entered into a new licensing agreement with Atreca granting Atreca a worldwide, royalty-bearing license to research, develop and commercialize novel ADCs. The Company is eligible to receive up to $210.0 million in option exercise fees and clinical development and regulatory approval milestone payments and up to $540.0 million in commercial milestone payments, as well as tiered royalties on worldwide sales. The Company's performance obligations in relation to the research license fee of $5.0 million were met by June 30, 2022. Accordingly, the research license fee was recognized as revenue during the three and six months ended June 30, 2022.
At June 30, 2022, contract assets from research, collaboration and licensing agreements were $3,000, which is presented within accounts receivable (December 31, 2021: nil) and contract liabilities were $32,941 (December 31, 2021: $32,941). Contract liabilities include deferred revenue relating to an upfront payment received in 2018 under the licensing and collaboration agreement with BeiGene. During the three and six months ended June 30, 2022, the Company did not recognize any revenue from performance obligations satisfied in relation to the deferred revenue (three and six months ended June 30, 2021: nil). Amounts not expected to be recognized as revenue in the next twelve months from June 30, 2022 have been classified as long-term deferred revenue.
10. Other income, net
Other income, net, consists of the following:
|Three Months Ended|
|Six Months Ended|
|Foreign exchange gain, net ||$||723 ||$||435 ||$||361 ||$||372 |
|Other||36 ||(94)||83 ||98 |
|$||759 ||$||341 ||$||444 ||$||470 |
The Company leased separate office and laboratory spaces in Vancouver, British Columbia, which expired in February 2022. On January 25, 2019, the Company entered into a lease for a new building in Vancouver to serve as the Company’s future headquarters, including both office and laboratory space. This lease commenced for accounting purposes in May 2021 and construction of leasehold improvements was completed during the six months ended June 30, 2022. This lease has an initial term of ten years, with two five-year extension options. In addition, the Company leases office space in Seattle, Washington with lease terms expiring in May 2027. None of the optional extension periods have been included in the determination of the right-of-use assets or the lease liabilities for operating leases as the Company did not consider it reasonably certain that the Company would exercise any such options. The Company also leases office equipment under capital lease agreements.
The balance sheet classification of the Company’s lease liabilities was as follows:
Operating lease liabilities:
|$||2,725 ||$||1,310 |
|29,170 ||30,923 |
Total operating lease liabilities
|31,895 ||$||32,233 |
Finance lease liabilities:
Current portion included in other current liabilities
|— ||22 |
Long-term portion included in other long-term liabilities
|113 ||100 |
Total finance lease liabilities
|113 ||122 |
Total lease liabilities
|$||32,008 ||$||32,355 |
Cash paid for amounts included in the measurement of operating lease liabilities for the six months ended June 30, 2022 was $2,128 and was included in net cash used in operating activities in the consolidated statement of cash flows.
As of June 30, 2022, the maturities of the Company’s operating lease liabilities were as follows:
|Within 1 year||$||3,942 |
|1 to 2 years||5,079 |
|2 to 3 years||5,197 |
|3 to 4 years||5,244 |
|4 to 5 years||4,586 |
|Total operating lease payments||37,855 |
|Operating lease liabilities||$||31,895 |
As of June 30, 2022, the weighted average remaining lease term is 8.0 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 six months ended June 30, 2022, the Company incurred total operating lease expenses of $4,997 (2021: $2,378), which included lease expenses associated with fixed lease payments of $4,837 (2021: $2,176), and variable payments associated with common area maintenance and similar expenses of $160 (2021: $202).
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.
•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 June 30, 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:
|Level 1||Level 2||Level 3|
|Commercial paper||$||61,567 ||$||— ||$||61,567 ||$||— |
|GICs||43,184 ||— ||43,184 ||— |
|Total||$||104,751 ||$||— ||$||104,751 ||$||— |
|Liability for contingent consideration (note 13)||1,248 ||— ||— ||1,248 |
|Total||$||1,248 ||$||— ||$||— ||$||1,248 |
|Level 1||Level 2||Level 3|
|Commercial paper||$||61,387 ||$||— ||$||61,387 ||$||— |
|GICs||50,741 ||— ||50,741 ||— |
|Total||$||112,128 ||$||— ||$||112,128 ||$||— |
|Liability for contingent consideration (note 13)||1,498 ||— ||— ||1,498 |
|Total||$||1,498 ||$||— ||$||— ||$||1,498 |
The following table presents the changes in fair value of the Company’s liability for contingent consideration:
of the period
fair value of
|Amounts paid or transferred to payables||Liability at end|
of the period
|Three months ended June 30, 2022||$||1,248 ||$||— ||$||— ||$||1,248 |
|Six months ended June 30, 2022||$||1,498 ||$||— ||$||(250)||$||1,248 |
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 June 30, 2022, the maximum exposure to credit risk for accounts receivable was $4,196 (December 31, 2021: $15,614) and all accounts receivable are due within the next 12 months. As at June 30, 2022 and December 31, 2021, the Company has recognized nominal amounts of provision for expected credit losses in relation to accounts receivable.
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 June 30, 2022, the Company’s net monetary assets denominated in Canadian dollars were $4,535 (C$7,755).
The operating results and financial position of the Company are reported in U.S. dollars in the Company’s interim condensed consolidated financial statements. The fluctuation of the U.S. dollar relative to the Canadian dollar and other foreign currencies will have an impact on the reported balances for net assets, net loss and shareholders’ equity in the Company’s interim condensed consolidated financial statements.
13. Commitments and Contingencies
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 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 June 30, 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.
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.
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 June 30, 2022 compared to December 31, 2021. During the six months ended June 30, 2022, the Company recorded the following costs for the Restructuring:
•employee severance and termination benefits of $5,317;
•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 $1,286.
Of the net charges, $6,249 expense and $5,516 recovery of stock-based compensation were recorded in research and development expenses, and $3,620 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 June 30, 2022 the net outstanding liability related to employee severance termination benefits and other contract liabilities was approximately $3,479. The Company recognized the majority of these charges during the six months ended June 30, 2022 and does not expect to incur any material additional costs related to the Restructuring.
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.
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, zanidatamab zovodotin (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 zanidatamab zovodotin 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 zanidatamab zovodotin 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);
•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.