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 March 31, 2023
|☐||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: 001-41535
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of|
incorporation or organization)
108 Patriot Drive, Suite A
Middletown, Delaware 19709
(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||Trading Symbol(s)||Name of each exchange on which registered|
Common Stock, $0.00001 par value per share Preferred Stock Purchase Rights
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
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 shares of common stock of the registrant, $0.00001 par value per share, as of May 3, 2023 was 64,171,282.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 2023
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes “forward-looking statements” or information within the meaning of applicable securities legislation, including Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934 as amended (the “Exchange Act”). 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 expected benefits and other impacts of the Redomicile Transactions (as defined below).
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 manage our growth 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 enter into and 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 any acquisitions we may pursue;
•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 referred to in the section titled “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 or our partners’ ability to obtain regulatory approval for 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;
•our ability to achieve milestones and receive associated milestone payments pursuant to the terms of our collaboration agreements, including the Original Jazz Collaboration Agreement (as defined below);
•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, as well as social and political unrest in the locations where our clinical trials are held, 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;
•unanticipated tax consequences in connection with the Redomicile Transactions;
•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 and expand 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 foreign 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 stockholders associated with future financings;
•restrictions on our ability to seek financing, which may be imposed by future debt;
•unstable market and economic conditions;
•currency fluctuations and changes in foreign currency exchange rates;
•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 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;
•risks related to the manufacture of product candidates and difficulties in production;
•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 reliance on the performance of independent clinical investigators and contract research organizations (“CROs”);
•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 foreign 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 certain reduced reporting and disclosure requirements available to smaller reporting companies may make our common stock 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 ability to manage any organizational growth;
•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.
Unless the context otherwise requires or otherwise expressly states, all references in this Quarterly Report on Form 10-Q to “Zymeworks,” the “Company,” “we,” “us” and “our” (i) for periods until the Redomicile Transactions (as defined below), refer to Zymeworks BC Inc. and its subsidiaries and (ii) for periods after the Redomicile Transactions, 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 months ended March 31, 2023
Condensed Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars except share data)
|Cash and cash equivalents||$||181,583 ||$||400,912 |
|Short-term investments (note 5)||159,208 ||91,320 |
|Accounts receivable||66,916 ||33,400 |
|Prepaid expenses and other current assets||18,665 ||19,074 |
|Total current assets||426,372 ||544,706 |
|Deferred financing fees||73 ||10 |
|Long-term investments (note 5)||72,474 ||886 |
|Long-term prepaid assets||16,886 ||15,729 |
|Deferred tax asset ||1,405 ||1,345 |
|Property and equipment, net ||23,514 ||24,713 |
|Operating lease right-of-use assets||22,300 ||22,937 |
|Intangible assets, net ||8,075 ||8,755 |
|Acquired in-process research and development (note 6)||17,628 ||17,628 |
|Goodwill (note 6) ||12,016 ||12,016 |
|Total assets||$||600,743 ||$||648,725 |
|Liabilities and stockholders’ equity|
|Accounts payable and accrued liabilities (note 7)||$||59,250 ||$||87,468 |
|Income tax payable||840 ||840 |
|Fair value of liability classified stock options||1,504 ||1,642 |
|Current portion of operating lease liability (note 11)||3,372 ||3,322 |
|Deferred revenue (note 9)||2,353 ||2,353 |
|Total current liabilities||67,319 ||95,625 |
|Long-term portion of operating lease liability (note 11)||23,847 ||24,667 |
|Deferred revenue (note 9)||30,588 ||30,588 |
|Other long-term liabilities (note 7)||3,595 ||3,101 |
|Deferred tax liability ||1,856 ||1,788 |
|Total liabilities||127,205 ||155,769 |
Common stock, $0.00001 par value; 900,000,000 authorized shares at March 31, 2023 and December 31, 2022, respectively; 64,083,770 and 63,059,501 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively (note 8)
|900,490 ||886,322 |
Preferred shares, $0.00001 par value; 100,000,000 authorized shares of preferred stock, out of which, one share of preferred stock is a share of Special Voting Preferred Stock and outstanding as of March 31, 2023 and December 31, 2022 (note 8b).
|— ||— |
Exchangeable shares, no par value, 656,888 and 1,424,533 issued and outstanding shares at March 31, 2023 and December 31, 2022, respectively (note 8b)
|9,426 ||20,442 |
|Additional paid-in capital||152,677 ||151,614 |
|Accumulated other comprehensive loss||(5,939)||(6,659)|
|Total stockholders’ equity||473,538 ||492,956 |
|Total liabilities and stockholders’ equity||$||600,743 ||$||648,725 |
|Research collaboration and licensing agreements (note 9)|
|Commitments and contingencies (note 13)|
|Subsequent events (note 14)|
The accompanying notes are an integral part of these financial statements
Condensed Consolidated Statements of Loss and Comprehensive Loss
(Expressed in thousands of U.S. dollars except share and per share data)
|Three Months Ended March 31,|
|Research and development collaborations (note 9)||$||35,578 ||$||1,916 |
|Research and development||45,912 ||62,510 |
|General and administrative||16,947 ||12,092 |
|Total operating expenses||62,859 ||74,602 |
|Loss from operations||(27,281)||(72,686)|
|Interest income||4,805 ||302 |
|Other expense, net (note 10)||(487)||(315)|
|Total other income (expense), net||4,318 ||(13)|
|Loss before income taxes||(22,963)||(72,699)|
|Income tax (expense) recovery||(1,390)||74 |
|Other comprehensive income:|
Unrealized gain on available for sale securities, net of tax of nil (note 5)
|720 ||— |
|Total other comprehensive income||720 ||— |
|Net loss per common share (note 4):|
|Weighted-average common stock outstanding (note 4):|
|Basic||66,739,308 ||61,367,368 |
|Diluted||66,742,080 ||61,378,170 |
The accompanying notes are an integral part of these financial statements
Condensed Consolidated Statement of Changes in Stockholders’ Equity
(Expressed in thousands of U.S. dollars except share data)
|Preferred stock||Exchangeable shares||Common stock||Accumulated|
|Balance at January 1, 2023||1 ||$||— ||1,424,533 ||$||20,442 ||63,059,501 ||$||886,322 ||$||(558,763)||$||(6,659)||$||151,614 ||$||492,956 |
|Issuance of common stock on exercise of options||— ||— ||— ||— ||203,239 ||2,649 ||— ||— ||(1,001)||1,648 |
|Issuance of common stock through employee stock purchase plan||— ||— ||— ||— ||50,420 ||371 ||— ||— ||— ||371 |
Issuance of common stock upon vesting of restricted stock units (“RSUs”)
|— ||— ||— ||— ||2,965 ||132 ||— ||— ||(132)||— |
Issuance of common stock for retracted exchangeable shares (note 8b)
|— ||— ||(767,645)||(11,016)||767,645 ||11,016 ||— ||— ||— ||— |
|Stock-based compensation (recovery)||— ||— ||— ||— ||— ||— ||— ||— ||2,196 ||2,196 |
|Other comprehensive income (note 5)||— ||— ||— ||— ||— ||— ||— ||720 ||— ||720 |
|Net loss||— ||— ||— ||— ||— ||— ||(24,353)||— ||— ||(24,353)|
|Balance at March 31, 2023||1 ||$||— ||656,888 ||$||9,426 ||64,083,770 ||$||900,490 ||$||(583,116)||$||(5,939)||$||152,677 ||$||473,538 |
|Preferred stock||Exchangeable shares||Common stock||Accumulated|
|Balance at January 1, 2022||— ||$||— ||— ||$||— ||46,633,935 ||$||741,147 ||$||(683,104)||$||(6,659)||$||197,710 ||$||249,094 |
|Issuance of common stock on exercise of options||— ||— ||— ||— ||2,112 ||20 ||— ||— ||(8)||12 |
|Issuance of common stock through employee stock purchase plan||— ||— ||— ||— ||61,801 ||1,361 ||— ||— ||— ||1,361 |
|Issuance of common stock upon vesting of restricted stock units RSUs||— ||— ||— ||— ||37,398 ||1,382 ||— ||— ||(1,382)||— |
|Issuance of common stock and pre-funded warrants in connection with public offering, net of offering costs (notes 8a and 8c)||— ||— ||— ||— ||11,035,000 ||82,549 ||— ||— ||24,985 ||107,534 |
|Stock-based compensation expense||— ||— ||— ||— ||— ||— ||— ||— ||(2,932)||(2,932)|
|Net loss||— ||— ||— ||— ||— ||— ||(72,625)||— ||— ||(72,625)|
|Balance at March 31, 2022||— ||$||— ||— ||$||— ||57,770,246 ||$||826,459 ||$||(755,729)||$||(6,659)||$||218,373 ||$||282,444 |
The accompanying notes are an integral part of these financial statements
Condensed Consolidated Statements of Cash Flows
(Expressed in thousands of U.S. dollars)
|Three Months Ended March 31,|
|Cash flows from operating activities:|
|Items not involving cash:|
|Depreciation of property and equipment||1,584 ||2,311 |
|Amortization of intangible assets||679 ||155 |
|Stock-based compensation expense (recovery)||2,325 ||(8,177)|
|Amortization of operating lease right-of-use assets||637 ||2,865 |
|Deferred income tax expense||9 ||735 |
|Change in fair value of contingent consideration liability||499 ||— |
|Unrealized foreign exchange (gain) loss||(298)||686 |
|Changes in non-cash operating working capital:|
|Accounts receivable||(33,516)||11,325 |
|Prepaid expenses and other current assets||(1,671)||(3,859)|
|Accounts payable and accrued liabilities||(28,266)||11,820 |
|Operating lease liabilities||(820)||(648)|
|Net cash used in operating activities||(83,191)||(55,412)|
|Cash flows from financing activities:|
|Proceeds from public offering, net of issuance costs (notes 8a)||— ||107,720 |
|Issuance of common stock on exercise of stock options (note 8e)||1,516 ||12 |
|Issuance of common stock through employee stock purchase plan||236 ||863 |
|Deferred financing fees||— ||19 |
|Finance lease payments||(14)||(4)|
|Net cash provided by financing activities||1,738 ||108,610 |
|Cash flows from investing activities:|
|Net (purchases)/redemptions of investments||(137,836)||25,278 |
|Acquisition of property and equipment||(386)||(4,158)|
|Acquisition of intangible assets||— ||(546)|
|Net cash (used in) provided by investing activities||(138,222)||20,574 |
|Effect of exchange rate changes on cash and cash equivalents||346 ||(123)|
|Net change in cash and cash equivalents||(219,329)||73,649 |
|Cash and cash equivalents, beginning of period||400,912 ||201,867 |
|Cash and cash equivalents, end of period||$||181,583 ||$||275,516 |
|Supplemental disclosure of non-cash investing and financing items:|
|Leased assets obtained in exchange for operating lease liabilities||$||— ||$||72 |
|Acquisition of property and equipment in accounts payable and accrued liabilities||— ||1,590 |
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. together with its subsidiaries (collectively the “Company” or “Zymeworks”) is a clinical-stage biopharmaceutical company dedicated to the development of next-generation multifunctional biotherapeutics. Zymeworks BC Inc. (previously known as "Zymeworks Inc.") 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.
On July 15, 2022, the Company announced its intention to become a Delaware corporation, subject to receipt of necessary shareholder, stock exchange, and court approvals (the "Redomicile Transactions"). The Redomicile Transactions were completed on October 13, 2022. On October 13, 2022, the Company changed its name to Zymeworks BC Inc. Unless the context otherwise requires or otherwise expressly states, all references in the accompanying consolidated financial statements to “Zymeworks,” the “Company,” “we,” “us” and “our” (i) for periods until completion of the Redomicile Transactions, refer to Zymeworks BC Inc. and its subsidiaries and (ii) for periods after completion of the Redomicile Transactions, refer to Zymeworks Inc. (formerly known as Zymeworks Delaware Inc.) and its subsidiaries.
To effect the Redomicile Transactions, the Company conducted a share exchange, pursuant to which holders of the Company's common shares exchanged their common shares in the Company for shares of common stock of Zymeworks Inc. (formerly known as Zymeworks Delaware Inc.) or, at their election with respect to all or a portion of their common shares in the Company and subject to applicable eligibility criteria and an overall cap, exchangeable shares (the “Exchangeable Shares”) in the capital of a newly formed indirect subsidiary of Zymeworks Inc. A special meeting of Company security holders was held on October 7, 2022 to approve the Redomicile Transactions. The Redomicile Transactions were governed by a transaction agreement dated July 14, 2022, as restated and amended on August 18, 2022 (the “Restated and Amended Transaction Agreement”), by and among the Company and its direct or indirect subsidiaries Zymeworks Inc., Zymeworks CallCo ULC (“CallCo”) and Zymeworks ExchangeCo Ltd. (“ExchangeCo”), including a plan of arrangement included as Exhibit A to the Restated and Amended Transaction Agreement (the “Plan of Arrangement”).
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, 2022.
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, 2023 and 2022 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, 2022.
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 months ended March 31, 2023, 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 months ended March 31, 2023 and 2022 was as follows:
|Three Months Ended|
|Net loss attributable to common stockholders:|
|Adjustment for change in fair value of liability classified stock options||(354)||(302)|
|Weighted-average common stock outstanding:|
|Basic||66,739,308 ||61,367,368 |
|Adjustment for dilutive effect of liability classified stock options||2,772 ||10,802 |
|Diluted||66,742,080 ||61,378,170 |
|Net loss per common share – basic||$||(0.36)||$||(1.18)|
|Net loss per common share – diluted||$||(0.37)||$||(1.19)|
Weighted average number of shares of common stock used in the basic and diluted earnings per share calculations include Exchangeable Shares and the pre-funded warrants issued in connection with the Company’s June 2019 and January 2020 offerings as the warrants are exercisable at any time for nominal cash consideration.
Short-term investments are high credit quality investment grade debt securities with original maturities exceeding three months and accrue interest based on a fixed interest rate for the term. Short-term investments also consist of guaranteed investment certificates (“GICs”) acquired from financial institutions. The Company classifies its marketable securities as available-for-sale securities and are carried at fair value.
Long-term investments at March 31, 2023 consist of debt securities with remaining maturities exceeding twelve months and equity securities of $886 acquired for strategic purposes or in connection with licensing and collaboration agreements (December 31, 2022 - $886). As the Company's investments in equity securities do not have readily determinable fair value, they are carried at cost, less any impairment, including any adjustments resulting from observable price changes.
Unrealized fair value gains and losses for investments classified as available-for-sale are recorded through other comprehensive income (loss) in stockholders' equity. When the fair value of an available-for-sale security falls below the amortized cost basis it is evaluated to determine if any of the decline in value is attributable to credit loss. Decreases in fair value attributable to credit loss are recorded directly to the consolidated statement of loss with a corresponding allowance for credit losses, limited to the amount that the fair value below the amortized cost basis. If the credit quality subsequently improves the allowance is reversed up to a maximum of the previously recorded credit losses. When the Company intends to sell an impaired available-for-sale security, or if it is more likely than not that the Company will be required to sell the security prior to recovering the amortized cost basis, the entire fair value adjustment will immediately be recognized in the consolidated statement of loss with no corresponding allowance for credit losses. Realized gains and losses and credit losses, if any, on available-for-sale securities are included in interest income (expense), based on the specific identification method. Available-for-sale securities are also adjusted for amortization of premiums and accretion of discounts to maturity, with such amortization and accretion included within interest income.
|March 31, 2023|
|Amortized Cost||Unrealized Gain (Loss)||Fair Value|
|GICs and mutual funds||$||92,371 ||$||— ||$||92,371 |
|U.S. Treasury notes||34,175 ||209 ||34,384 |
|Corporate debt securities||32,484 ||(31)||32,453 |
|159,030 ||178 ||159,208 |
|U.S. Treasury notes||15,781 ||183 ||15,964 |
|Corporate debt securities||55,265 ||359 ||55,624 |
|Equity securities||886 ||— ||886 |
|71,932 ||542 ||72,474 |
|$||230,962 ||$||720 ||$||231,682 |
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 $17,628 at both March 31, 2023 and December 31, 2022. The Company concluded that there were no impairment indicators related to IPR&D as of March 31, 2023.
The Company performed its most recent annual impairment test of goodwill as of December 31, 2022. As part of the evaluation of the recoverability of goodwill, the Company identified only one reporting unit to which the total carrying amount of goodwill has been assigned. As at December 31, 2022, the Company performed a qualitative assessment for its annual impairment test of goodwill after concluding that it was not more likely than not that the fair value of the reporting unit was less than its carrying
value. Consequently, a quantitative impairment test was not required. The Company concluded that there were no impairment indicators related to goodwill as of March 31, 2023.
Accounts payable and accrued expenses consisted of the following:
|Trade payables||$||6,433 ||$||7,863 |
|Accrued research and development expenses||36,650 ||39,358 |
|Goods and services tax payable||— ||16,244 |
|Employee compensation and vacation accruals||6,178 ||14,365 |
|Accrued legal and professional fees||8,202 ||7,799 |
|Other||1,787 ||1,839 |
|Total||$||59,250 ||$||87,468 |
As of March 31, 2023, the net outstanding liability related to contract liabilities in relation to the Company's restructuring program, which was implemented and completed in 2022, was approximately $310.
Other long-term liabilities consisted of the following:
|Liability for contingent consideration (note 12)||$||1,747 ||$||1,248 |
|Liability from in-licensing agreements||1,047 ||1,047 |
|Finance lease liability (note 11)||121 ||124 |
|Other||680 ||682 |
|Total||$||3,595 ||$||3,101 |
8. Stockholders’ 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 8c) 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 Share Capital and Preferred Stock
The Company’s authorized share capital consists of 1,000,000,000 shares of stock, consisting of (i) 900,000,000 shares of common stock, par value $0.00001 per share, and (ii) 100,000,000 shares of preferred stock, par value $0.00001 per share.
In connection with the Plan of Arrangement, we issued to Computershare Trust Company of Canada, a trust company existing under the laws of Canada (the “Share Trustee”), one share of our preferred stock, par value $0.00001 per share, which has certain variable voting rights in proportion to the number of Exchangeable Shares outstanding (the “Special Voting Preferred Stock”), enabling the Share Trustee to exercise voting rights for the benefit of the Exchangeable Shareholders.
Immediately prior to the completion of the Redomicile Transactions, there were 61,699,387 Zymeworks BC Inc. common shares issued and outstanding. In connection with the consummation of the Plan of Arrangement, 60,274,854 shares of Common Stock and 1,424,533 Exchangeable Shares were issued to former Zymeworks BC shareholders. As of March 31, 2023, there were 656,888 Exchangeable Shares held by former Zymeworks BC shareholders (December 31, 2022: 1,424,533). We will issue shares of our common stock as consideration when a holder of Exchangeable Shares calls for Exchangeable Shares to be retracted by ExchangeCo, when ExchangeCo redeems Exchangeable Shares from the holder, or when CallCo purchases Exchangeable Shares
from the Exchangeable Shareholder under CallCo’s overriding call rights. These Exchangeable Shares and the Special Voting Preferred Stock, when taken together, are similar in substance to the Company’s common stock.
c.Pre-Funded Common Share Warrants
In connection with the public offerings completed on June 24, 2019, January 27, 2020 and January 31, 2022 (note 8a), the Company issued a total of 8,581,961 pre-funded warrants which granted holders of warrants the right to purchase up to 8,581,961 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.
On August 23, 2022, October 25, 2022 and October 27, 2022, a total of 6,502,737 pre-funded warrants were exercised in exchange for issuance of 6,502,675 common shares. As of March 31, 2023, there were 2,079,224 pre-funded warrants outstanding.
In connection with redomicile transactions in 2022, Zymeworks BC Inc. assigned to the Company, and the Company assumed, all of Zymeworks BC Inc.’s rights and obligations under each of the stock-based compensation plans, as described below, and such plans became the Company’s stock-based compensation plans, with each outstanding award assumed by the Company and deemed exchanged for equivalent awards of the Company, except that the security issuable upon exercise or settlement, as applicable, will be shares of common stock of the Company rather than common shares of Zymeworks BC Inc.
Original Stock Option Plan
On July 14, 2006, the shareholders of the Company approved an employee stock option plan (the “Original Plan”). 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. The exercise prices of the Company’s stock options under the Original Plan are denominated in Canadian dollars. 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 Plan and Inducement 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, and also permitted the Company to grant incentive stock options (“ISOs”), within the meaning of Section 422 of the Internal Revenue Code, to its employees, until the shares reserved for issuance of ISOs were depleted. 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. As of March 31, 2023, 3,807,249 shares of common stock were available for future award grants under the New Plan (December 31, 2022: 3,205,132 shares of common stock).
On January 5, 2022, board of directors approved the Zymeworks Inc. Inducement Stock Option and Equity Compensation Plan (the "Inducement Plan") and reserved 750,000 of the Company’s common shares for issuance pursuant to equity awards granted thereunder. As of March 31, 2023, 50,000 shares of common stock were available for future award grants under this plan.
The following table summarizes the Company's RSU activity under the New Plan since December 31, 2022:
|Number of RSUs||Weighted-|
date fair value
|Outstanding, December 31, 2022||227,223 ||17.36 |
|Granted||864,100 ||8.03 |
|Vested and settled||(32,633)||32.09 |
|Outstanding, March 31, 2023||998,856 ||8.88 |
As of March 31, 2023, there was $5,984 of unamortized RSU expense that will be recognized over a weighted average period of 1.83 years.
The following table summarizes the Company’s stock options granted in Canadian dollars under the Original Plan and the New Plan:
|Outstanding, December 31, 2022||2,147,141 ||19.02 ||14.03 ||6.29||1,460 ||1,078 |
|Granted||— ||— ||— |
|Exercised||(163,151)||11.88 ||8.85 |
|Forfeited||(58,917)||20.43 ||15.19 |
|Outstanding, March 31, 2023||1,925,073 ||19.58 ||14.48 ||6.30||2,525 ||1,868 |The following table summarizes the Company’s stock options granted in U.S. dollars under the New Plan and the Inducement Plan:
|Outstanding, December 31, 2022||5,565,145 ||17.10 ||7.86||1,928 |
|Granted||1,589,550 ||8.05 |
|Outstanding, March 31, 2023||6,729,639 ||14.86 ||8.09||5,404 |
During the three months ended March 31, 2023, the Company received cash proceeds of $1,516 from stock options exercised.
The stock options outstanding at March 31, 2023 expire at various dates from January 1, 2024 to March 9, 2033.
The estimated fair values of options granted to officers, directors, employees and consultants are amortized over the relevant vesting periods. Stock-based compensation expense for equity classified instruments, as well as the financial statement impact of the amortization and periodic revaluation of liability classified instruments, are recorded in research and development expense, general and administration expense and finance expense as follows:
|Three Months Ended March 31,|
|Research and development expense:|
|Stock-based compensation expense for equity classified instruments||$||441 ||$||(2,747)|
|Change in fair value of liability classified instruments||4 ||(474)|
|General and administrative expense:|
|Stock-based compensation expense for equity classified instruments||$||2,386 ||$||(2,232)|
|Change in fair value of liability classified instruments||(654)||(2,876)|
|Finance expense (income):|
|Change in fair value of liability classified instruments||7 ||(30)|
Amounts for equity classified instruments above include stock-based compensation expense relating to RSUs of $655 for the three months ended March 31, 2023 (2022: $604).
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:
|Three Months Ended March 31,|
|Dividend yield||0 ||%||0 ||%|
|Expected volatility||67.8 ||%||77.3 ||%|
|Risk-free interest rate||3.82 ||%||1.84 ||%|
|Expected average life of options||6.07 years||5.93 years|The weighted-average Black-Scholes option pricing assumptions for liability classified stock options outstanding at March 31, 2023 and 2022 are as follows:
|0 ||%||0 ||%|
|80.6 ||%||74.8 ||%|
Risk-free interest rate
|3.70 ||%||2.04 ||%|
Expected average option term
|1.78 years||2.20 years|
Number of liability classified stock options outstanding
At March 31, 2023, the unamortized compensation expense related to unvested options was $15,571. The remaining unamortized compensation expense as of March 31, 2023 will be recognized over a weighted-average period of 1.68 years.
e.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. 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, 2023, the Company recorded
compensation expense of $141 (2022: $183) in research and development expense and general and administrative expense accounts. As of March 31, 2023, the total amount contributed by ESPP participants and not yet settled is $238 (December 31, 2022: $287).
9. Research, Collaboration and Licensing Agreements
Revenue recognized from the Company’s strategic partnerships is summarized as follows:
|Three Months Ended|
|Development support payments||$||30,895 ||$||— |
|Drug supply||3,528 ||— |
|Research support and other payments from other partners||1,155 ||1,916 |
|$||35,578 ||$||1,916 |
Since December 31, 2022, there have not been any material changes to the key terms of our collaboration and license agreements, except the termination of the Collaboration and Cross License Agreement between Zymeworks BC and Daiichi Sankyo, dated September 26, 2016 (“2016 Daiichi Collaboration Agreement”). The termination of the 2016 Daiichi Collaboration Agreement did not have any financial impact during the three months ended March 31, 2023, and it has no impact on the License Agreement, dated May 14, 2018, by and between Daiichi Sankyo and Zymeworks BC, which remains in full force and effect. 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, 2022.
At March 31, 2023, contract assets from research, collaboration and licensing agreements were $3,000, which is presented within accounts receivable (December 31, 2022: $3,000) and contract liabilities were $32,941 (December 31, 2022: $32,941). Contract liabilities include deferred revenue relating to an upfront payment received in 2018 under the licensing and collaboration agreement with BeiGene. During the three months ended March 31, 2023, the Company did not recognize any revenue from performance obligations satisfied in relation to the deferred revenue (three months ended March 31, 2022: nil). Amounts not expected to be recognized as revenue in the next twelve months from March 31, 2023 have been classified as long-term deferred revenue.
10. Other expense, net
Other expense, net, consists of the following:
|Three Months Ended|
|Foreign exchange loss, net ||$||(456)||$||(362)|
The lease for our Vancouver location, which we entered into in January 2019, has an initial term expiring in February 2032, with two five-year extension options. In addition, the Company leases office space in Seattle, Washington with lease terms expiring in May 2027. None of the optional extension periods have been included in the determination of the right-of-use assets or the lease liabilities for operating leases as the Company did not consider it reasonably certain that the Company would exercise any such options. The Company also leases office equipment under capital lease agreements.
The balance sheet classification of the Company’s lease liabilities was as follows:
Operating lease liabilities:
|$||3,372 ||$||3,322 |
|23,847 ||24,667 |
Total operating lease liabilities
|27,219 ||$||27,989 |
Finance lease liabilities:
|Current portion||16 ||16 |
|Long-term portion||121 ||124 |
Total finance lease liabilities
|137 ||140 |
Total lease liabilities
|$||27,356 ||$||28,129 |
Cash paid for amounts included in the measurement of operating lease liabilities for the three months ended March 31, 2023 was $1,141 and was included in net cash used in operating activities in the consolidated statement of cash flows.
As of March 31, 2023, the maturities of the Company’s operating lease liabilities were as follows:
|Within 1 year||$||4,456 |
|1 to 2 years||4,531 |
|2 to 3 years||4,615 |
|3 to 4 years||4,481 |
|4 to 5 years||3,110 |
|Total operating lease payments||32,094 |
|Operating lease liabilities||$||27,219 |
As of March 31, 2023, the weighted average remaining lease term is 7.5 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, 2023, the Company incurred total operating lease expenses of $1,043 (2022: $3,865), which included lease expenses associated with fixed lease payments of $657 (2022: $3,828), and variable payments associated with common area maintenance and similar expenses of $386 (2022: $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.
•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, 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, 2023, 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|
|Cash and cash equivalents:|
|Cash and GICs||$||181,583 ||$||181,583 ||$||— ||$||— |
|GICs and mutual funds||92,371 ||92,371 ||— ||— |
|U.S. Treasury notes||50,348 ||50,348 ||— ||— |
|Corporate debt securities||88,077 ||— ||88,077 ||— |
|Total||$||412,379 ||$||324,302 ||$||88,077 ||$||— |
|Liability for contingent consideration (note 13)||1,747 ||— ||— ||1,747 |
|Total||$||1,747 ||$||— ||$||— ||$||1,747 |
|Level 1||Level 2||Level 3|
|Cash and GICs||$||400,912 ||$||400,912 ||$||— ||$||— |
|GICs||91,320 ||91,320 ||— ||— |
|Total||$||492,232 ||$||492,232 ||$||— ||$||— |
|Liability for contingent consideration (note 13)||1,248 ||— ||— ||1,248 |
|Total||$||1,248 ||$||— ||$||— ||$||1,248 |
The following table presents the changes in fair value of the Company’s liability for contingent consideration:
of the period
fair value of
|Amounts paid or transferred to payables||Liability at end|
of the period
|Three months ended March 31, 2023||$||1,248 ||$||499 ||$||— ||$||1,747 |
|Three months ended March 31, 2022||$||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 March 31, 2023, the maximum exposure to credit risk for accounts receivable was $66,916, 90% of which was from Jazz Pharmaceuticals Ireland Limited (a subsidiary of Jazz Pharmaceuticals plc, collectively referred to as “Jazz”) (December 31, 2022: $33,400) and all accounts receivable are due within the next 12 months. As at March 31, 2023 and December 31, 2022, 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, short-term and long-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, 2023, the Company’s net monetary assets denominated in Canadian dollars were $2,636 (C$3,607).
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 stockholders’ 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 of up to an aggregate of C$8.5 million, consisting of (i) a C$2.5 million payment when the first patient is dosed in the first Phase 2 trial and (ii) a C$6.0 million payment when the first patient is dosed in the first Phase 3 trial, to CDRD Ventures Inc. (“CVI”) upon the direct achievement of certain development milestones for products incorporating certain Kairos intellectual property. In addition, CVI is eligible to receive low single-digit royalty payments from the Company on the net sales of such products. For out-licensed products and technologies incorporating certain Kairos intellectual property, the Company may also be required to pay CVI a mid-single digit percentage of certain future revenue. As of March 31, 2023, the contingent consideration had an estimated fair value of $1,747, which has been recorded within other long-term liabilities on the Company’s consolidated balance sheet (December 31, 2022: $1,248). 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.
14. Subsequent Events
On April 25, 2023, Zymeworks BC Inc. (“Zymeworks BC”), a subsidiary of the Company, Zymeworks Biopharmaceuticals Inc. (“ZBI”), a subsidiary of Zymeworks BC, Zymeworks Zanidatamab Inc. (“ZZI”), a subsidiary of ZBI formed in December 2022 focused on the Company’s development program for zanidatamab, and Jazz Pharmaceuticals, Inc. (“Jazz Inc.”), entered into a Stock and Asset Purchase Agreement (the “Transfer Agreement”). Under the Transfer Agreement, (i) Jazz Inc. will acquire from ZBI 100% of the issued and outstanding capital stock of ZZI, (ii) Jazz Inc. will engage certain Zymeworks BC and ZZI employees associated with the development of zanidatamab, and (iii) Zymeworks BC and ZBI will transfer to Jazz Inc. or one of its affiliates contracts with respect to the engagement of certain independent contractors of Zymeworks BC and ZBI that currently work on the Program (as defined below). In addition, Jazz Inc. will acquire from Zymeworks BC and ZBI certain contracts related to the Program, organizational documents and other records of ZZI, certain regulatory filings related to the Program, certain other books, records and other files, documents and information related to the Program, and certain employment records of service providers to be employed by Jazz Inc. and its affiliates following the Closing (as defined below). Subject to the terms and conditions of the Transfer Agreement, Jazz Inc. or one of its affiliates will assume certain liabilities that arise following the Closing related to the acquired assets and the Program, including with respect to transferred service providers.
Zymeworks BC and Jazz (an affiliate of Jazz Inc.) will amend and restate the license and collaboration agreement dated October 18, 2022 by and between Zymeworks BC and Jazz (the “Original Jazz Collaboration Agreement”) (as amended the “Amended Jazz Collaboration Agreement”) to reflect the transfer of responsibility for the Program. Under the Amended Jazz Collaboration Agreement, the financial terms of the Original Jazz Collaboration Agreement, as previously disclosed, will be unchanged, except that the costs of the Program (including ongoing costs related to the transferred service providers) incurred following the Closing will be directly borne by Jazz instead of being incurred by Zymeworks BC and charged back to Jazz for reimbursement, though Zymeworks BC will remain eligible for reimbursement of certain costs for activities where Zymeworks BC maintains responsibility under the Amended Jazz Collaboration Agreement. However, certain costs of the Program that Zymeworks BC expects to incur will not be recovered by Zymeworks BC. Under the Amended Jazz Collaboration Agreement, Jazz and Zymeworks BC will net the costs for which each is responsible. These costs are expected to be finalized by the parties by mid-2023. “Program” refers to (i) ongoing clinical trials in certain sites in South Korea that are the responsibility of Zymeworks BC under the Original Jazz Collaboration Agreement and (ii) clinical trials for zanidatamab, other than the studies referenced in (i), initiated by Zymeworks BC in the Territory (as defined in the Original Jazz Collaboration Agreement) prior to the execution of the Original Jazz Collaboration Agreement.
The consummation of the transactions contemplated by the Transfer Agreement, including the execution of the Amended Jazz Collaboration Agreement, are expected to occur in May 2023 (the “Closing”). In connection with the Closing, the parties will enter into a transition services agreement pursuant to which Zymeworks BC and ZBI will provide to Jazz Inc. and Jazz Inc. will provide to Zymeworks BC and ZBI certain services to support the transfer of the acquired assets and the Program on a transitional basis.
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, 2022 included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 7, 2023 and with the securities commissions in all provinces and territories of Canada on March 7, 2023. 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. Unless the context otherwise requires or otherwise expressly states, all references in this Quarterly Report on Form 10-Q to “Zymeworks,” the “Company,” “we,” “us” and “our” (i) for periods until completion of the Redomicile Transactions, refer to Zymeworks BC Inc. and its subsidiaries and (ii) for periods after completion of the Redomicile Transactions, refer to Zymeworks Inc. and its subsidiaries.
Zymeworks is a biotechnology company committed to the discovery, development, and commercialization of novel, multifunctional biotherapeutics. Zymeworks’ mission is to make a meaningful difference for people impacted by difficult-to-treat cancers and other serious diseases. Zymeworks’ complementary therapeutic platforms and fully integrated drug development engine provide the flexibility and compatibility to precisely engineer and develop highly differentiated antibody-based therapeutic candidates.
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 cancers (“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. These also include proof of concept trials in (i) first-line locally advanced or metastatic HER2-positive colorectal cancer (“CRC”), GEA, or BTC in combination with standard of care chemotherapy, (ii) first-line locally advanced or metastatic HER2-positive GEA in combination with tislelizumab and chemotherapy, (iii) first-line locally advanced or metastatic HER2-positive breast cancer in combination with docetaxel, (iv) previously treated locally advanced or metastatic HER2-positive, hormone receptor-positive breast cancer in combination with Pfizer’s Ibrance (palbociclib) and fulvestrant, (v) 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), and (vi) locally advanced (unresectable) and/or metastatic HER2-expressing cancers in Japanese patients. Zymeworks has entered into separate agreements with BeiGene and Jazz Pharmaceuticals Ireland Limited (a subsidiary of Jazz Pharmaceuticals plc, collectively referred to as “Jazz”), granting each of BeiGene and Jazz with exclusive rights to develop and commercialize zanidatamab in different territories.
Our second product candidate, zanidatamab zovodotin (formerly known as “ZW49”), combines the unique biparatopic antibody design of zanidatamab with our ZymeLink auristatin antibody-drug conjugate (“ADC”) technology, comprised of our proprietary cytotoxin (cancer cell-killing compound) and cleavable linker. We designed zanidatamab zovodotin to be a potential best-in-class HER2-targeting ADC to further address unmet need across a range of HER2-expressing cancers. In January 2023, we announced our intent to continue development of zanidatamab zovodotin at the recommended phase two dose (“RP2D”) of 2.5 mg/kg dosed every three weeks. Before the end of 2023, we expect to present additional data from our Phase 1 clinical trial that further supports this RP2D and commence enrollment in multiple Phase 2 studies.
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 with an emphasis on developing ADC and multi-specific antibody therapeutics (“MSAT”) candidates. Our pipeline of preclinical product candidates includes two lead programs, ZW191 and
ZW171, for which we expect to submit investigational new drug (“IND”) or foreign equivalent applications in 2024, as well as multiple early-stage preclinical programs in development. The two lead programs are as follows: