ADC Therapeutics SA

Table of Contents

ADC Therapeutics SA

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(in thousands, except per share amounts)

1. Description of Business and Organization

ADC Therapeutics is a leading, commercial-stage global pioneer in the field of antibody drug conjugates (“ADCs”) committed to advancing its proprietary ADC technology platform to transform the treatment paradigm for patients with hematologic malignancies and solid tumors.

Since its inception, the Company has devoted its resources to developing a validated and differentiated technology platform with multiple payloads and targets, a robust next-generation research and development toolbox, and specialized end-to-end capabilities. The Company generates sales from its flagship product, ZYNLONTA, which is currently approved in the U.S. for the treatment of relapsed or refractory diffuse large B-cell lymphoma (“DLBCL”) in the third-line setting and has also been granted conditional marketing authorization in Europe. Additionally, the Company is seeking to expand ZYNLONTA into earlier lines of therapy and indolent lymphomas, and is committed to advancing its portfolio and pipeline through its continued research, development, regulatory and commercialization activities.

The Company was incorporated on June 6, 2011 under the laws of Switzerland, with its registered office located at Route de la Corniche 3B, 1066 Epalinges, Switzerland. The Company hasthree wholly-owned subsidiaries: ADC Therapeutics America, Inc. (“ADCT America”), which is incorporated in Delaware, USA on December 10, 2014. ADC Therapeutics (UK) Ltd (“ADCT UK”), incorporated in England on December 12, 2014 and ADC Therapeutics (NL) B.V. which was incorporated in the Netherlands on February 25, 2022. The Company and its three subsidiaries form the ADCT Group (the “Group”).

All references to “ADC Therapeutics,” “the Company", “we,” “us,” and “our” refer to ADC Therapeutics SA and its unaudited condensed consolidated subsidiaries unless otherwise indicated.

2. Summary of Significant Accounting Policies

Basis of preparation and principles of consolidation

These accompanying unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly-owned subsidiaries, have been prepared following the requirements of the U.S. Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by U.S. generally accepted accounting principles, or U.S. GAAP, can be condensed or omitted. All intercompany transactions and balances have been eliminated in consolidation. The information included in this Quarterly Report on Form 10‑Q should be read in conjunction with our annual audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2023.

In the opinion of management, these condensed consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair statement of our financial position and operating results. The results for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024, for any other interim period or for any future period.

The Company’s significant accounting policies have not changed substantially from those previously described in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2023.

The Company is managed and operated as one business segment, focused on the global development and commercialization of targeted ADC cancer therapies. A single management team that reports to the chief operating decision-maker, the Chief Executive Officer, comprehensively manages and allocates resources at the global corporate level. Accordingly, the Company views its business and manages its operations as a single operating segment.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures in the unaudited condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on assumptions believed to be reasonable under the circumstances. Actual results could differ materially from those estimates.

Going Concern

We are responsible for evaluating, and providing disclosure of uncertainties about, our ability to continue as a going concern. As of March 31, 2024, we had cash and cash equivalents of $234.3 million. Based on our evaluation, we concluded there is no substantial doubt about our ability to continue as a going concern within one year from the date the unaudited condensed consolidated financial statements were issued.

Recent Accounting Pronouncements

New accounting pronouncements which have been adopted

There are no accounting pronouncements that the Company has recently adopted.

Issued but not yet adopted

In November 2023, the FASB amended guidance in ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The revised guidance requires that a public entity disclose significant segment expenses regularly reviewed by the chief operating decision maker (CODM), including public entities with a single reportable segment. The amended guidance is effective for fiscal years beginning in January 2024 and interim periods beginning January 2025 on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the effect that adoption of ASU 2023-07 will have on its consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU requires the annual financial statements to include consistent categories and greater disaggregation of information in the rate reconciliation, and income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for the Company’s annual reporting periods beginning in January 2025. Adoption is either with a prospective method or a fully retrospective method of transition. Early adoption is permitted. The Company is currently evaluating the effect that adoption of ASU 2023-09 will have on its consolidated financial statements.

3. Fair value measurements

The carrying amount of Cash and cash equivalents, Accounts Receivable, net and Accounts payable is a reasonable approximation of fair value due to the short-term nature of these assets and liabilities. Financial liabilities that are not measured at fair value on a recurring basis include our senior secured term loan. The estimated fair value of debt is based on Level 2 inputs, including our understanding of current market rates we could obtain for similar loans.

The Deerfield warrants, which are measured at fair value on a recurring basis, were as follows as of March 31, 2024 and December 31, 2023:

Fair values must be estimated at the end of each reporting period with regard to the Deerfield warrants. The approach to valuation follows the fair value principle, and the key input factors are described for the Deerfield warrants in note 10, "Deerfield warrants." A Black-Scholes model was used to calculate the fair values.

There were no transfers between the respective levels during the period.

4. Inventory

As of March 31, 2024 and December 31, 2023 inventory consisted of the following:

Inventory write-downs of $748 and $53 were recognized and charged to cost of product sales in the Company’s Unaudited Condensed Consolidated Interim Statement of Operations for the three months ended March 31, 2024 and 2023, respectively.

5. Property and equipment

Property and equipment as of March 31, 2024 and December 31, 2023 consisted of the following:

Depreciation expense for the three months ended March 31, 2024 and 2023 was $331 and $263, respectively.

6. Interest in joint venture

On December 14, 2020, the Company formed a new joint venture company, Overland ADCT BioPharma, with Overland Pharmaceuticals (“Overland”) to develop and commercialize ZYNLONTA, and three of the Company’s ADC product candidates, ADCT-601, ADCT-602 and ADCT-901 (collectively, the “Licensed Products”), in greater China and Singapore (the “Territory”).

The table below provides a rollforward of the Company’s interest in Overland ADCT BioPharma as of March 31, 2024 and December 31, 2023.

7. Income taxes

Income tax expense for the three months ended March 31, 2024 was $0.2 million relative to loss before income taxes of $45.8 million. The income tax expense for the three months ended March 31, 2023 was $0.5 million relative to loss before income taxes of $57.5 million. The expense for the three months ended March 31, 2024 is the result of income generated by our UK operations for which tax expense has been recognized based on a full year estimated income tax liability, and the inability to recognize benefit on losses in the U.S. and Switzerland. Whereas the expense for the three months ended March 31, 2023 was the result of income generated in the U.S. and UK. The decrease in U.S. income in the first quarter of 2024 is due to a change in the Company operating and transfer pricing model which was implemented in October 2023. We remain a full valuation allowance against all deferred tax assets, and each reporting period, we evaluate the need for a valuation allowance on our deferred tax assets by jurisdiction and adjust our estimates as more information becomes available.

8. Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:

9. Senior secured term loan facility

On August 15, 2022, the Company, ADCT UK and ADCT America entered into the Loan Agreement, pursuant to which the Company may borrow up to $175.0 million principal amount of secured term loans, including (i) a First Tranche and (ii) Future Tranches. On August 15, 2022, the Company drew down $120.0 million principal amount of term loans under the Loan Agreement.

On August 15, 2022, the Company also issued to the lenders under the Loan Agreement warrants to purchase an aggregate of 527,295 common shares, which warrants have an exercise price of $8.30 per share. Each warrant is exercisable, on a cash or a cashless basis, at the option of the holder at any time on or prior to August 15, 2032. The warrants are freestanding financial instruments that are indexed to the Company’s common stock and meet all other conditions for equity classification under ASC 480 and ASC 815. Accordingly, these warrants are recognized in equity and accounted for as a component of additional paid-in capital at the time of issuance.

On August 15, 2022, the Company also entered into the Share Purchase Agreement with the lenders under the Loan Agreement to purchase 733,568 common shares of the Company.

For the three months ended March 31, 2024 and 2023, the Company recorded interest expense on the senior secured term loan in the amount of $4,403 and $4,540, respectively, which was recorded in interest expense in the unaudited condensed consolidated statement of operations. The EIR at March 31, 2024 was 16.81%.

The following table provides a summary of the interest expense for the Company’s senior secured term loan for the three months ended March 31, 2024 and 2023:

The amount at which the senior secured term loan is presented as a liability in the unaudited condensed consolidated balance sheet represents the net present value of all future cash outflows associated with the loan discounted at the EIR. The carrying value of the senior secured term loan is $113.2 million and $112.7 million as of March 31, 2024 and December 31, 2023, respectively.

Contractual payments due under our senior secured term loans, including exit fees are as follows (in thousands):

10. Deerfield warrants

Pursuant to the Exchange Agreement with Deerfield entered into on August 15, 2022, the Company issued warrants to purchase an aggregate of 4,412,840 common shares. The warrants consist of warrants to purchase an aggregate of 2,631,578 common shares at an exercise price of $24.70 per share and warrants to purchase an aggregate of 1,781,262 common shares at an exercise price of $28.07 per share. Each warrant is exercisable, on a cash or a cashless basis, at the option of the holder, at any time on or prior to May 19, 2025. The warrant obligation is remeasured to fair value at the end of each reporting period. Changes in the fair value (gains or losses) of the warrant obligation at the end of each period are recorded in the unaudited condensed consolidated statement of operations.

During the three months ended March 31, 2024 and 2023, the Company recognized (expense) income of $(3,068) and $616, respectively, as a result of changes in the fair value of the warrant obligation. The fair value of the warrant obligation as of March 31, 2024 and December 31, 2023 was $3,364 and $296, respectively. The increase in fair value of the warrant obligation from December 31, 2023 to March 31, 2024 was primarily due to the increase in the fair value of the underlying shares during the respective period. This amount was recorded to Other, net in the unaudited condensed consolidated statement of operations. See note 15, "Other income (expense)" for further information.

The Company used a third party valuation firm to assist in calculating the fair value of the Deerfield warrant obligation, using the Black-Scholes option-pricing model. Key inputs for the valuation of the warrant obligation as of March 31, 2024 and December 31, 2023 were as follows:

11. Deferred royalty obligation

On August 25, 2021, the Company entered into a royalty purchase agreement with certain entities managed by HCR for up to $325.0 million. Under the terms of the agreement, the Company received gross proceeds of $225.0 million upon closing (the “First Investment Amount”) and received an additional $75.0 million during the year ended December 31, 2023 upon the first commercial sale of ZYNLONTA in the United Kingdom or any European Union country (the “Second Investment Amount”) and together with the First Investment Amount, the “Investment Amount”).

The table below provides a rollforward of the Company’s debt obligation relating to the royalty purchase agreement.

12. Pension and post-retirement benefit obligations

The pension plan for Swiss employees is a defined benefit pension plan. The Company contracted with the Swiss Life Collective BVG Foundation based in Zurich for the provision of occupational benefits. All benefits in accordance with the regulations are reinsured in their entirety with Swiss Life SA within the framework of the corresponding contract. This pension solution fully reinsures the risks of disability, death and longevity with Swiss Life. Swiss Life invests the vested pension capital and provides a 100% capital and interest guarantee. The pension plan is entitled to an annual bonus from Swiss Life comprising the effective savings, risk and cost results.

Although, as is the case with many Swiss pension plans, the amount of ultimate pension benefit is not defined, certain legal obligations of the plan create constructive obligations on the employer to pay further contributions to fund an eventual deficit; this results in the plan nevertheless being accounted for as a defined benefit plan.

The net periodic benefit cost for the three months ended March 31, 2024 and 2023 is as follows:

The components of net periodic benefit cost are included in operating expense on the unaudited condensed consolidated statement of operation.

13. Commitments and contingencies

Manufacturing Commitments

Some of our inventory components require long lead times to manufacture. Therefore, we make long-term investments in our supply chain in order to ensure we have enough drug product to meet current and future revenue forecasts. Third party manufacturing agreements include non-cancelable obligations related to the supply of ZYNLONTA and the company’s product candidates. There have been no material changes related to our non-cancelable obligations under these arrangements as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

Contingent liabilities

From time to time, we may be involved in various legal matters generally incidental to our business. Although the results of litigation and claims cannot be predicted with certainty, after discussion with legal counsel, we are not aware of any matters for which the likelihood of a loss is probable and reasonably estimable and which could have a material impact on our unaudited condensed consolidated financial condition, liquidity, or results of operations.

14. Revenue

The table below provides a disaggregation of revenues by type and customer location for the three months ended March 31, 2024 and 2023:

(1)Europe, the Middle East and Africa

Product revenue, net

The table below provides a rollforward of the Company’s accruals related to the GTN sales adjustments for the three months ended March 31, 2024 and 2023.

The table below provides the classification of the accruals related to the GTN sales adjustment included in the Company’s unaudited condensed consolidated balance sheet as of March 31, 2024 and December 31, 2023.

Customers from which we derive more than 10% of our total product revenues for the three months ended March 31, 2024 and 2023 are as follows:

15. Other income (expense)

Interest Income

Interest income includes interest received from banks on our cash balances. Interest income was $2.9 million and $2.2 million for the three months ended March 31, 2024 and 2023, respectively.

Interest Expense

The components of Interest expense for the three months ended March 31, 2024 and 2023 are as follows:

Other, net

The components of Other, net for the three months ended March 31, 2024 and 2023 are as follows:

16. Share-based compensation

The Company has adopted various share-based compensation incentive plans. Under these plans the Company may at its discretion grant to the plan participants, such as directors, certain employees, and service providers awards in the form of restricted shares and restricted share units (“RSUs”), share options, share appreciation rights, performance awards and other share-based awards. The 2019 Equity Incentive Plan was adopted in November 2019 while the Conditional Share Capital Plan and the Inducement Plan were adopted in December 2023.

2019 Equity Incentive Plan

In November 2019, the Company adopted the 2019 Equity Incentive Plan. Under the 2019 Equity Incentive Plan, the Company may at its discretion grant to plan participants, such as directors, certain employees and service providers, awards in the form of restricted shares and RSUs, share options, share appreciation rights, performance awards and other share-based awards. The Company has reserved 17,741,355 common shares for future issuance under the 2019 Equity Incentive Plan (including share-based equity awards granted to date less awards forfeited). As of March 31, 2024, the Company has 4,076,361 common shares available for the future issuance of share-based equity awards.

As of March 31, 2024 and December 31, 2023, the cumulative amount recorded as a net increase to additional paid-in capital within equity on the unaudited condensed consolidated balance sheet in respect of the 2019 Equity Incentive Plan was $156,925 and $157,906, respectively. The amounts of expense (reversal) recognized for all awards for services received during the three months ended March 31, 2024 and 2023 were $(981) and $7,977, respectively.

Conditional Share Capital Plan

In December 2023, the Company adopted the Conditional Share Capital Plan. Under the Conditional Share Capital Plan, the Company may at its discretion grant to plan participants, such as directors, certain employees and service providers, awards in the form of restricted shares and RSUs, share options, share appreciation rights, performance awards and other share-based awards. The Company has reserved 8,000,000 common shares for future issuance under this plan. As of March 31, 2024, the Company has 2,614,409 common shares available for the future issuance of share-based equity awards.

As of March 31, 2024, the cumulative amount recorded as a net increase to additional paid-in capital within equity on the unaudited condensed consolidated balance sheet in respect of the Conditional Share Capital Plan was $1,382. The amounts of expense for all awards recognized for services received during the three months ended March 31, 2024 was $1,063.

Inducement Plan

In December 2023, the Company adopted the Inducement Plan. Under the Inducement Plan, the Company may at its discretion grant to any employee who is eligible to receive an employment inducement grant in accordance with NYSE Listed Company Manual 303A.08. The maximum number of common shares in respect of which awards may be granted under the Inducement Plan is 1,000,000 common shares (including share-based equity awards granted to date, less awards forfeited), subject to adjustment in the event of certain corporate transactions or events if necessary to prevent dilution or enlargement of the benefits made available under the plan. Equity incentive awards under the Inducement Plan may be granted in the form of options, share appreciation rights, restricted shares, restricted share units, performance awards or other share-based awards but not “incentive stock options” for purposes of U.S. tax laws. There have been no awards issued in connection with the Inducement Plan for the three months ended March 31, 2024.

Share Options

Pursuant to the 2019 Equity Incentive Plan, the Company may grant share options to its directors, certain employees and service providers working for the benefit of the Company at the time. The exercise price per share option is set by the Company at the fair market value of the underlying common shares on the date of grant, as determined by the Company, which is generally the closing share price of the Company’s common shares traded on the NYSE. The awards generally vest 25% on the first anniversary of the date of grant, and thereafter evenly on a monthly basis over the subsequent three years. The contractual term of each share option award granted isten years. Under the grant, the options may be settled only in common shares of the Company. Therefore, the grants of share options under the 2019 Equity Incentive Plan have been accounted for as equity-settled under US GAAP. As such, the Company records a charge for the vested portion of award grants and for partially earned but non-vested portions of award grants. This results in a front-loaded charge to the Company’s unaudited condensed consolidated statement of operation and a corresponding increase to additional paid-in capital within equity on the unaudited condensed consolidated balance sheet.

The expense (reversal) recognized for services received during the three months ended March 31, 2024 and 2023 is $(1,434) and $4,781, respectively.

Movements in the number of awards outstanding under the Plans described above and their related weighted average strike prices are as follows:

As of March 31, 2024,5,046,977 awards are vested and exercisable out of the total outstanding awards of 10,607,005 common shares. As of March 31, 2024, the weighted average strike price and weighted average remaining life for vested and exercisable awards is $18.64 and 6.00 years, respectively. Awards outstanding as of March 31, 2024 have expiration dates through 2034. The weighted average grant date fair value of the awards granted during the three months ended March 31, 2024 was $2.68. The aggregate intrinsic value of vested and exercisable options was zero. As of March 31, 2024, the unrecognized compensation cost related to 5,560,028 unvested share options expected to vest was $11.1 million. This unrecognized cost will be recognized over an estimated weighted-average amortization period of 1.55.

The fair values of the options granted under the Equity Incentive Plan 2019 were determined on the date of the grant using the Black-Scholes option-pricing model. The Company used a third-party valuation firm to assist in calculating the fair value of the award grants per participant.

The fair values of the options granted during the three months ended March 31, 2024 and 2023 were determined on the date of grant using the following assumptions:

During the three months ended March 31, 2023, the expected volatility was based on the Company’s historical volatility and selected volatility determined by median values observed among other comparable public companies. Beginning in the third quarter of 2023, the Company’s expected volatility is no longer determined by values observed among other comparable companies and is now based on the Company’s historical volatility. The award life for options granted was based on the time interval between the date of grant and the date during theten-year life after which, when making the grant, the Company expected on average that participants would exercise their options.

RSUs

Pursuant to the 2019 Equity Incentive Plan and Conditional Share Capital Plan, the Company may grant RSUs to its directors, certain employees and service providers working for the benefit of the Company at the time. The awards generally vest annually over a period oftwo tothree years commencing on the first anniversary of the date of grant. The RSUs may be settled only in common shares of the Company. Therefore, the grant of RSUs under both the 2019 Equity Incentive Plan and Conditional Share Capital Plan have been accounted for as equity-settled under US GAAP. As such, the Company records a charge for the vested portion of award grants and for partially earned but non-vested portions of award grants. This results in a front-loaded charge to the Company’s unaudited condensed consolidated statement of operation and a corresponding increase to additional paid-in capital within equity on the unaudited condensed consolidated balance sheet. The expense recognized for services received during the three months ended

March 31, 2024 and 2023 is $1,516 and $3,196, respectively.

(1)Includes 5,385,591 RSUs outstanding in connection with the Conditional Share Capital Pan.

The total fair value of RSU awards vested (as measured on the date of vesting) during the three months ended March 31, 2024 was $1.3 million.

Employee Stock Purchase Plan

In June 2022, the Company adopted the 2022 Employee Stock Purchase Plan (“ESPP”), which allows eligible employees to purchase designated shares of the Company's common shares at a discount, over a series of offering periods through accumulated payroll deductions. The Company offers the ESPP to employees twice a year with each having asix-month offering period. The first offering period is generally from January 1st through June 30th and the second offering period is from July 1st through December 31st. The grant date is the first day of each offering period.

The expense recognized related to the ESPP during the three months ended March 31, 2024 and 2023 is $76 and $97, respectively.

17. Loss per share

The basic loss per share is calculated by dividing the net loss attributable to shareholders by the weighted average number of shares in issue during the period, excluding common shares owned by the Company and held as treasury shares, as follows:

For the three months ended March 31, 2024 and 2023, basic and diluted loss per share are calculated on the weighted average number of shares issued and outstanding and exclude shares to be issued under the Equity Incentive Plan 2019, Conditional Share Capital Plan, the Company’s warrant agreements and 2022 ESPP as the effect of including those shares would be anti-dilutive. See note 9, “Senior secured term loan facility,” note 10, “Deerfield warrants” and note 16, “Share-based compensation expense,” for further information.

Potentially dilutive securities that were not included in the diluted per share calculations because the effect of including them would be anti-dilutive were as follows: