10-Q 1 chrs-20220331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to

Commission File Number: 001-36721

Coherus BioSciences, Inc.

(Exact name of registrant as specified in its charter)

Delaware

 

27-3615821

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

333 Twin Dolphin Drive, Suite 600

Redwood City, California 94065

(650) 649-3530

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

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, $0.0001 par value per share

CHRS

The Nasdaq Global Market

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).   Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No  

As of April 30, 2022, 77,422,970 shares of the registrant’s common stock were outstanding.

COHERUS BIOSCIENCES, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2022

TABLE OF CONTENTS

    

Page

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

3

PART I

FINANCIAL INFORMATION

5

ITEM 1

Unaudited Condensed Consolidated Financial Statements

5

 

Condensed Consolidated Balance Sheets

5

Condensed Consolidated Statements of Operations

6

Condensed Consolidated Statements of Comprehensive Loss

7

Condensed Consolidated Statements of Stockholders’ Equity

8

Condensed Consolidated Statements of Cash Flows

9

Notes to Condensed Consolidated Financial Statements

10

ITEM 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

ITEM 3

Quantitative and Qualitative Disclosure About Market Risk

40

ITEM 4

Controls and Procedures

41

PART II

OTHER INFORMATION

42

ITEM 1.

Legal Proceedings

42

ITEM 1A.

Risk Factors

42

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

100

ITEM 3

Defaults Upon Senior Securities

100

ITEM 4

Mine Safety Disclosures

100

ITEM 5

Other Information

100

ITEM 6.

Exhibits

100

Exhibit Index

100

Signatures

103

UDENYCA®, YUSIMRY™ and CIMERLI™, whether or not appearing in large print or with the trademark symbol, are trademarks of Coherus, its affiliates, related companies or its licensors or joint venture partners, unless otherwise noted. Trademarks and trade names of other companies appearing in this Quarterly Report on Form 10-Q are, to the knowledge of Coherus, the property of their respective owners.

2

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements that are not statements of historical facts contained in this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by words such as “aim,” “anticipate,” “assume,” “attempt,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “seek,” “should,” “strive,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

whether we will be able to continue to maintain or increase sales for our products in the United States;

our expectations regarding our ability to develop and commercialize toripalimab and CHS-006 and our other product candidates in the United States and Canada, including whether the trial results, data package or biologics license application (“BLA”) for toripalimab will be sufficient to support regulatory approval;

our ability to address comments raised in the complete response letter for the original BLA for toripalimab, timing to resubmit the original BLA for toripalimab and timing of the review for the original BLA resubmission for toripalimab;

whether our CIMERLI partner, Bioeq AG (“Bioeq”), will be able to obtain regulatory approval in the United States, whether we or Bioeq can overcome import restrictions that could affect the timing of the launch in the United States, or whether we will be able successfully to initiate sales of Bioeq’s biosimilar candidate upon such approval;

our ability to receive marketing authorization for the on-body injector presentation of UDENYCA®, including the timing of receiving such marketing authorization, if approved;

our ability to maintain regulatory approval for our products and our ability to obtain and maintain regulatory approval of our product candidates, if and when approved;

our expectations regarding government and third-party payer coverage and reimbursement;

our ability to manufacture our product candidates in conformity with regulatory requirements and to scale up manufacturing capacity of these products for commercial supply;

our reliance on third-party contract manufacturers to supply our product candidates for us;

our expectations regarding the potential market size and the size of the patient populations for our product candidates, if approved for commercial use;

our financial performance, including, but not limited to, projected future performance of our gross margins, research and development expenses and selling and general administrative expenses;

the implementation of strategic plans for our business, product and product candidates;

the initiation, timing, progress and results of future preclinical and clinical studies and our research and development programs;

3

the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates;

our expectations regarding the scope or enforceability of third-party intellectual property rights, or the applicability of such rights to our product candidates;

the cost, timing and outcomes of litigation involving our product candidates;

our reliance on third-party contract research organizations to conduct clinical trials of our product candidates;

the benefits of the use of our product candidates;

the rate and degree of market acceptance of our current or any future product candidates;

our ability to compete with companies currently producing competitor products, including Neulasta, Humira and Lucentis;

developments and projections relating to our competitors, our market opportunity and our industry; and

the potential impact of COVID-19 and the continuation of hostilities in Ukraine on our business and prospects.

We have based these forward-looking statements on our current expectations about future events. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including those identified in Part II, Item 1A Risk Factors and discussed elsewhere in this Quarterly Report on Form 10-Q. Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements included in this report are made only as of the date hereof. Except as required under federal securities laws and the rules and regulations of the Securities and Exchange Commission (“SEC”), we do not undertake, and specifically decline, any obligation to update any of these statements or to publicly announce the results of any revisions to any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise.

This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, publicly filed reports and similar sources.

4

PART I. FINANCIAL INFORMATION

ITEM 1.              Unaudited Condensed Consolidated Financial Statements

Coherus BioSciences, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)

March 31, 

December 31, 

    

2022

    

2021

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

325,680

$

417,195

Trade receivables, net

 

117,039

 

123,022

Inventory

 

36,945

 

37,642

Prepaid manufacturing

 

13,418

 

13,666

Other prepaid and other assets

 

19,361

 

10,798

Total current assets

 

512,443

 

602,323

Property and equipment, net

 

7,998

 

7,813

Inventory, non-current

 

59,427

 

55,610

Goodwill and intangible assets

 

3,563

 

3,563

Other assets, non-current

 

9,956

 

10,025

Total assets

$

593,387

$

679,334

Liabilities and Stockholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

21,092

$

16,159

Accrued rebates, fees and reserves

 

71,894

 

79,027

Accrued compensation

 

14,870

 

22,014

Accrued and other current liabilities

 

45,892

 

48,127

Total current liabilities

 

153,748

 

165,327

Term loans

195,849

75,513

Convertible notes

224,607

332,767

Lease liabilities, non-current

 

6,518

 

7,251

Other liabilities, non-current

 

102

 

750

Total liabilities

 

580,824

 

581,608

Commitments and contingencies (Note 8)

 

  

 

  

Stockholders’ equity:

 

  

 

  

Common stock ($0.0001 par value; shares authorized: 300,000,000; shares issued and outstanding: 77,338,171 and 76,930,096 at March 31, 2022 and December 31, 2021, respectively)

 

7

 

7

Additional paid-in capital

 

1,158,766

 

1,147,843

Accumulated other comprehensive loss

 

(272)

 

(270)

Accumulated deficit

 

(1,145,938)

 

(1,049,854)

Total stockholders' equity

 

12,563

 

97,726

Total liabilities and stockholders’ equity

$

593,387

$

679,334

See accompanying notes.

5

Coherus BioSciences, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)

Three Months Ended

March 31, 

    

2022

    

2021

Net revenue

$

60,115

$

83,034

Costs and expenses:

 

 

  

Cost of goods sold

 

9,370

 

7,511

Research and development

 

82,917

 

203,492

Selling, general and administrative

 

48,753

 

39,391

Total costs and expenses

 

141,040

 

250,394

Loss from operations

 

(80,925)

(167,360)

Interest expense

 

(8,969)

 

(5,648)

Loss on debt extinguishment

(6,222)

Other income, net

 

32

 

61

Net loss before income taxes

 

(96,084)

 

(172,947)

Income tax provision

 

 

Net loss

$

(96,084)

$

(172,947)

 

  

 

  

Basic and diluted net loss per share

$

(1.24)

$

(2.37)

 

  

 

  

Weighted-average number of shares used in computing basic and diluted net loss per share

 

77,253,699

 

72,832,953

See accompanying notes.

6

Coherus BioSciences, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

Three Months Ended

March 31, 

    

2022

    

2021

Net loss

$

(96,084)

$

(172,947)

Other comprehensive loss:

 

 

Unrealized loss on available-for-sale securities, net of tax

(37)

Foreign currency translation adjustments, net of tax

 

(2)

 

Comprehensive loss

$

(96,086)

$

(172,984)

See accompanying notes.

7

Coherus BioSciences, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share and per share data)

(unaudited)

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Comprehensive

Accumulated

Stockholders'

    

Shares

    

Amount

    

Capital

    

Loss

    

Deficit

    

Equity

Balances at December 31, 2021

 

76,930,096

$

7

$

1,147,843

$

(270)

$

(1,049,854)

$

97,726

Net loss

 

 

 

 

 

(96,084)

 

(96,084)

Issuance of common stock upon exercise of stock options

 

102,632

 

 

544

 

 

 

544

Issuance of common stock upon vesting of restricted stock units ("RSUs")

 

491,087

 

 

 

 

 

Taxes paid related to net share settlement of RSUs

(185,644)

(2,658)

(2,658)

Stock-based compensation expense

 

 

 

13,037

 

 

 

13,037

Other comprehensive loss, net of tax

 

 

 

 

(2)

 

 

(2)

Balances at March 31, 2022

 

77,338,171

$

7

$

1,158,766

$

(272)

$

(1,145,938)

$

12,563

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Comprehensive

Accumulated

Stockholders'

    

Shares

    

Amount

    

Capital

    

Loss

    

Deficit

    

Equity

Balances at December 31, 2020

 

72,513,348

$

7

$

1,043,991

$

(270)

$

(762,754)

$

280,974

Net loss

 

 

 

 

 

(172,947)

 

(172,947)

Issuance of common stock upon exercise of stock options

 

451,883

 

 

4,429

 

 

 

4,429

Issuance of common stock upon vesting of RSUs

 

252,846

 

 

 

 

 

Taxes paid related to net share settlement of RSUs

(95,169)

(1,730)

(1,730)

Stock-based compensation expense

 

 

 

16,982

 

 

 

16,982

Other comprehensive loss, net of tax

 

 

 

 

(37)

 

 

(37)

Balances at March 31, 2021

 

73,122,908

$

7

$

1,063,672

$

(307)

$

(935,701)

$

127,671

See accompanying notes.

8

Coherus BioSciences, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Three Months Ended

March 31, 

    

2022

    

2021

Operating activities

 

 

  

Net loss

$

(96,084)

$

(172,947)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

Depreciation and amortization

 

767

 

849

Stock-based compensation expense

 

12,879

 

16,884

Write-off of prepaid manufacturing services related to the termination of CHS-2020

3,210

Non-cash interest expense from amortization of debt discount & issuance costs

 

3,696

 

1,001

Upfront and option payments to Shanghai Junshi Biosciences Ltd. ("Junshi Biosciences")

 

35,000

 

145,000

Loss on debt extinguishment

6,222

Other non-cash adjustments, net

592

978

Changes in operating assets and liabilities:

 

 

Trade receivables, net

 

5,991

 

16,663

Inventory

 

(2,962)

 

(11,378)

Prepaid manufacturing

 

248

 

2,109

Other prepaid, current and non-current assets

 

(7,632)

 

(4,621)

Accounts payable

 

4,757

 

203

Accrued rebates, fees and reserves

 

(7,133)

 

(3,327)

Accrued compensation

 

(7,144)

 

(10,154)

Accrued and other current and non-current liabilities

 

(3,242)

 

16,897

Net cash (used in) provided by operating activities

 

(54,045)

 

1,367

Investing activities

 

  

 

  

Purchases of property and equipment

 

(615)

 

(145)

Purchases of investments in marketable securities

 

 

(140,330)

Upfront and option payments to Junshi Biosciences

 

(35,000)

 

(145,000)

Net cash used in investing activities

 

(35,615)

 

(285,475)

Financing activities

 

  

 

  

Proceeds from 2027 Term Loans, net of debt discount & issuance costs

191,190

Proceeds from issuance of common stock upon exercise of stock options

 

544

4,329

Taxes paid related to net share settlement of RSUs

 

(2,658)

(1,730)

Repayment of 2022 Convertible Notes and premiums

(109,000)

Repayment of 2025 Term Loan, premiums and exit fees

(81,750)

Other financing activities

(181)

(160)

Net cash (used in) provided by financing activities

 

(1,855)

 

2,439

Net decrease in cash, cash equivalents and restricted cash

 

(91,515)

 

(281,669)

Cash, cash equivalents and restricted cash at beginning of period

 

417,635

 

541,598

Cash, cash equivalents and restricted cash at end of period

$

326,120

$

259,929

See accompanying notes.

9

Coherus BioSciences, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1.       Organization and Summary of Significant Accounting Policies

Organization

Coherus BioSciences, Inc. (the “Company” or “Coherus”) is a commercial-stage biopharmaceutical company focused on the research, development and commercialization of innovative immunotherapies to treat cancer. The Company’s strategy is to build a leading immuno-oncology franchise funded with cash generated through net sales of its diversified portfolio of FDA-approved therapeutics. The Company’s headquarters and laboratories are located in Redwood City, California and in Camarillo, California, respectively. The Company sells UDENYCA, a biosimilar to Neulasta, a long-acting granulocyte-colony stimulating factor, in the United States. The United States Food and Drug Administration (“FDA”) approved YUSIMRY™ in December 2021, which the Company plans to launch in the United States on or after July 1, 2023, per the terms of an agreement with Humira manufacturer, AbbVie Inc. (“AbbVie”).

The Company’s product pipeline comprises the following five product candidates: toripalimab, an anti-PD-1 antibody being developed in collaboration with Junshi Biosciences; CIMERLI, a Lucentis biosimilar candidate in-licensed for commercial rights in the United States and Canada from Bioeq; CHS-006, an antibody targeting TIGIT being developed in collaboration with Junshi Biosciences; and two wholly-owned preclinical immuno-oncology programs, CHS-1000, an antibody targeting ILT4, and CHS-3318, an antibody targeting CCR8. In May 2022, the Company discontinued development of a bevacizumab (Avastin) biosimilar product candidate it had in-licensed for commercial rights in the United States from Innovent Biologics (Suzhou) Co., Ltd. (“Innovent”).

Basis of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of Coherus and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring accruals, that the Company believes are necessary to fairly state the financial position and the results of the Company’s operations and cash flows for interim periods in accordance with U.S. GAAP. Interim-period results are not necessarily indicative of results of operations or cash flows for a full year or any subsequent interim period.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”) filed with the SEC.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities when these values are not readily apparent from other sources. Estimates are assessed each period and updated to reflect current information. Accounting estimates and judgements are inherently uncertain and therefore actual results could differ from these estimates.

10

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets which, in aggregate, represent the amount reported in the condensed consolidated statements of cash flows:

March 31, 

(in thousands)

    

2022

    

2021

At beginning of period:

Cash and cash equivalents

$

417,195

$

541,158

Restricted cash

440

440

Total cash, cash equivalents and restricted cash

$

417,635

$

541,598

At end of period:

Cash and cash equivalents

$

325,680

$

259,489

Restricted cash

 

440

 

440

Total cash, cash equivalents and restricted cash

$

326,120

$

259,929

Restricted cash consists of deposits for letters of credit that the Company has provided to secure its obligations under certain leases and is included in other assets, non-current on the condensed consolidated balance sheets.

Investments in Marketable Securities

Investments in marketable securities primarily consist of corporate debt obligations and commercial paper. Management determines the appropriate classification of investments in marketable securities at the time of purchase based upon management’s intent with regards to such investment and reevaluates such designation as of each balance sheet date. The Company’s investment policy requires that it only invests in highly rated securities and limit its exposure to any single issuer. All investments in debt marketable securities are held as “available-for-sale” and are carried at the estimated fair value as determined based upon quoted market prices or pricing models for similar securities.

The Company classifies investments in marketable securities as short-term when they have remaining contractual maturities of one year or less from the balance sheet date. Unrealized gains and losses on available-for-sale securities are reported as a component of accumulated comprehensive income loss, with the exception of unrealized losses believed to be related to credit losses, if any, which are recognized in earnings in the period the impairment occurs. Impairment assessments are made at the individual security level each reporting period. When the fair value of an investment is less than its cost at the balance sheet date, a determination is made as to whether the impairment is related to a credit loss and, if it is, the portion of the impairment relating to credit loss is recorded as an allowance through net income. Realized gains and losses on available-for-sale securities are included in other income, net, based on the specific identification method.

Trade Receivables

Trade receivables are recorded net of allowances for chargebacks, cash discounts for prompt payment and credit losses. The Company estimates an allowance for expected credit losses by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. The corresponding expense for the credit loss allowance is reflected in selling, general and administrative expenses. The credit loss allowance was immaterial as of March 31, 2022 and December 31, 2021.

11

Recent Accounting Pronouncements

The Company has reviewed recent accounting pronouncements and concluded they are either not applicable to the business or that no material effect is expected on the condensed consolidated financial statements as a result of future adoption.

2.        Revenue

The Company recorded net revenue of $60.1 million and $83.0 million during the three months ended March 31, 2022 and 2021, respectively.

Gross revenues by significant customer as a percentage of total gross revenues are as follows:

Three Months Ended

 

March 31, 2022

 

March 31, 2021

 

McKesson Corporation

39

%

39

%

AmeriSource-Bergen Corporation

43

%

38

%

Cardinal Health, Inc.

17

%

21

%

Product Sales Discounts and Allowances

The activities and ending reserve balances for each significant category of discounts and allowances, which constitute variable consideration, were as follows:

Three Months Ended March 31, 2022

    

Chargebacks

    

    

Other Fees,

    

and Discounts

Co-pay

for Prompt

Assistance

(in thousands)

Payment

Rebates

and Returns

Total

Balances at December 31, 2021

$

29,665

$

54,004

$

26,054

$

109,723

Provision related to sales made in:

 

Current period

105,737

20,269

20,288

146,294

Prior period

(1,081)

(1,721)

(344)

(3,146)

Payments and customer credits issued

 

(107,625)

(24,216)

(22,440)

(154,281)

Balances at March 31, 2022

$

26,696

$

48,336

$

23,558

$

98,590

Three Months Ended March 31, 2021

    

Chargebacks

    

    

Other Fees,

    

and Discounts

Co-pay

for Prompt

Assistance

(in thousands)

Payment

Rebates

and Returns

Total

Balances at December 31, 2020

$

40,580

$

54,058

$

28,760

$

123,398

Provision related to sales made in:

Current period

 

114,670

30,233

25,130

170,033

Prior period

(2,316)

(1,888)

(823)

(5,027)

Payments and customer credits issued

 

(123,441)

 

(27,373)

 

(26,157)

 

(176,971)

Balances at March 31, 2021

$

29,493

$

55,030

$

26,910

$

111,433

12

Chargebacks and discounts for prompt payment are recorded as a reduction in trade receivables, and the remaining reserve balances are classified as current liabilities in the accompanying unaudited condensed consolidated balance sheets.

3.       Fair Value Measurements

The fair value of financial instruments are classified into one of the following categories:

Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Where quoted prices are available in an active market, securities are classified as Level 1. Level 1 assets consist of highly liquid money market funds that are included in cash and cash equivalents, and restricted cash. There were no unrealized gains and losses in the Company’s investments in these money market funds in either the first quarter of 2022 or 2021.

There were no transfers between Level 1, Level 2 and Level 3 during the periods presented.

Financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements were as follows:

Fair Value Measurements

March 31, 2022

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Financial Assets:

 

  

 

  

 

  

 

  

Cash and cash equivalents (money market funds)

$

325,680

$

$

$

325,680

Restricted cash (money market funds)

 

440

 

 

 

440

Total financial assets

$

326,120

$

$

$

326,120

    

Fair Value Measurements

December 31, 2021

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Financial Assets:

 

  

 

  

 

  

 

  

Cash and cash equivalents (money market funds)

$

417,165

$

$

$

417,165

Restricted cash (money market funds)

 

440

 

 

 

440

Total financial assets

$

417,605

$

$

$

417,605

13

4.           Inventory

Inventory consisted of the following:

    

March 31, 

December 31, 

(in thousands)

2022

2021

Raw Materials

$

5,317

$

4,870

Work in process

 

69,005

 

65,117

Finished goods

 

22,050

 

23,265

Total

$

96,372

$

93,252

Inventory expected to be sold more than twelve months from the balance sheet date is classified as inventory, non-current on the condensed consolidated balance sheets. As of March 31, 2022 and December 31, 2021, the non-current portion of inventory consisted of raw materials, work in process and a portion of finished goods. The following tables presents the inventory balance sheet classifications:

    

March 31, 

December 31, 

(in thousands)

2022

2021

Inventory

$

36,945

$

37,642

Inventory, non-current

 

59,427

 

55,610

Total

$

96,372

$

93,252

Prepaid manufacturing of $13.4 million as of March 31, 2022 includes prepayments of $9.0 million to a contract manufacturing organization (“CMO”) for manufacturing services for UDENYCA, which the Company expects to be converted into inventory within the next twelve months; and prepayments of $4.4 million to various CMOs for research and development pipeline programs. Prepaid manufacturing of $13.7 million as of December 31, 2021 included prepayments of $8.3 million to a CMO for manufacturing services for UDENYCA; and prepayments of $5.4 million to various CMOs for research and development pipeline programs.

In February 2021, the Company announced the discontinuation of the development of CHS-2020, a biosimilar of Eylea® as part of a realignment of research and development resources toward other development programs. As a result, during the quarter ended March 31, 2021, the Company recognized $11.5 million within research and development expenses on its condensed consolidated statement of operations, which included an impairment charge of $3.2 million for the write-off of prepaid manufacturing services no longer deemed to have future benefits.

14

5.       Balance Sheet Components

Property and Equipment, Net

Property and equipment, net consists of the following:

    

March 31, 

December 31, 

(in thousands)

2022

2021

Machinery and equipment

$

12,409

$

11,876

Computer equipment and software

 

3,042

 

3,033

Furniture and fixtures

 

1,129

 

1,129

Leasehold improvements

 

5,942

 

5,942

Finance lease right of use assets

2,342

2,294

Construction in progress

 

750

 

388

Total property and equipment

 

25,614

 

24,662

Accumulated depreciation and amortization

 

(17,616)

 

(16,849)

Property and equipment, net

$

7,998

$

7,813

Depreciation and amortization expense was $0.8 million and $0.8 million for the three months ended March 31, 2022 and 2021, respectively. Capitalized interest costs were not material at March 31, 2022 and December 31, 2021, respectively.

Accrued and Other Current Liabilities

Accrued and other current liabilities are summarized as follows:

    

March 31, 

December 31, 

(in thousands)

2022

2021

Accrued manufacturing and clinical

$

15,237

$

30,541

Accrued co-development costs for toripalimab

15,115

1,926

Lease liabilities, current

3,370

3,492

Accrued other

 

12,170

 

12,168

Total Accrued and other current liabilities

$

45,892

$

48,127

6.       Collaborations and Other Arrangements

Junshi Biosciences

On February 1, 2021, the Company entered into an Exclusive License and Commercialization Agreement (the “Collaboration Agreement”) with Junshi Biosciences for the co-development and commercialization of toripalimab, Junshi Biosciences’ anti-PD-1 antibody, in the United States and Canada.

Under the terms of the Collaboration Agreement, the Company paid $150.0 million upfront for exclusive rights to toripalimab in the United States and Canada, an option in these territories to Junshi Biosciences’ anti-TIGIT antibody CHS-006, an option in these territories to a next-generation engineered IL-2 cytokine, and certain negotiation rights to two undisclosed preclinical immuno-oncology drug candidates. The Company will have the right to conduct all commercial activities of toripalimab in the United States and Canada. The Company will be obligated to pay Junshi Biosciences a 20% royalty on net sales of toripalimab and up to an aggregate $380.0 million in one-time payments for the achievement of various regulatory and sales milestones.

15

In March 2022, the Company paid $35.0 million for the exercise of its option to license CHS-006. The Company will lead further development of CHS-006 and will be responsible for the associated development costs as set forth in the Collaboration Agreement. If the Company exercises its remaining option for the IL-2 cytokine, it will be obligated to pay an additional option exercise fee of $35.0 million. Additionally, for each exercised option, the Company will be obligated to pay Junshi Biosciences an 18% royalty on net sales and up to an aggregate $255.0 million for the achievement of various regulatory and sales milestones, including up to $170.0 million for attainment of certain sales thresholds. Under the Collaboration Agreement, the Company retains the right to collaborate in the development of toripalimab and the other licensed compounds, including CHS-006, and will pay for a portion of these co-development activities up to a maximum of $25.0 million per licensed compound per year. Additionally, the Company is responsible for certain associated regulatory and technology transfer costs for toripalimab and other licensed compounds and will reimburse Junshi Biosciences for such costs.

The licensing transaction and the exercise of the option were accounted for as asset acquisitions under the relevant accounting rules. The Company recognized research and development expense of $50.1 million, inclusive of the $35.0 million option fee, for the three months ended March 31, 2022, and $151.6 million inclusive of $145.0 million for the upfront payment for the exclusive rights to toripalimab for the three months ended March 31, 2021. Accrued and other current liabilities on the condensed consolidated balance sheet as of March 31, 2022 included $15.1 million related to the co-development, regulatory and technology transfer costs related to these programs. The Company entered into a Right of First Negotiation agreement with Junshi Biosciences and paid a fee of $5.0 million which was fully expensed as research and development expense in the fourth quarter of 2020. The Right of First Negotiation fee was fully credited against the total upfront license fee obligation under the Collaboration Agreement.

As of March 31, 2022, the Company did not have any outstanding milestone or royalty payment obligations to Junshi Biosciences. The additional milestone payments, option fee the IL-2 cytokine and royalties are contingent upon future events and, therefore, will be recorded when it is probable that a milestone will be achieved, option fee will be incurred or when royalties are due.

In connection with the Collaboration Agreement, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Junshi Biosciences agreeing, subject to customary conditions, to acquire certain equity interests in the Company. Pursuant to the Stock Purchase Agreement, on April 16, 2021, the Company issued 2,491,988 unregistered shares of its common stock to Junshi Biosciences, at a price per share of $20.06, for an aggregate value of approximately $50.0 million cash. Under the terms of the Stock Purchase Agreement, Junshi Biosciences is not permitted to sell, transfer, make any short sale of, or grant any option for the sale of the common stock for the two-year period following its effective date. The Collaboration Agreement and the Stock Purchase Agreement were negotiated concurrently and were therefore evaluated as a single agreement. The Company used the “Finnerty” and “Asian put” valuation models and determined the fair value for the discount for lack of marketability (“DLOM”) was $9.0 million at the date the shares were issued. The fair value of the DLOM was attributable to the Collaboration Agreement and was included as an offset against the research and development expense in the condensed consolidated statement of operations for the three months ending June 30, 2021.

Innovent Biologics (Suzhou) Co., Ltd.

On January 13, 2020, the Company entered into a license agreement (the “License Agreement”) with Innovent for the development and commercialization of a biosimilar version of bevacizumab (Avastin) in any dosage form and presentations (“bevacizumab Licensed Product”) in the United States and Canada (the “Territory”). Under the License Agreement, Innovent granted to the Company an exclusive, royalty-bearing license to develop and commercialize the bevacizumab Licensed Product in the field of treatment, prevention or amelioration of any human diseases and conditions as included in the label of Avastin. Under the License Agreement, the Company also acquired an option to develop and commercialize Innovent’s biosimilar version of rituximab (Rituxan®) in any dosage form and presentations (the “rituximab Licensed Product” and together with the bevacizumab Licensed Product, the “Innovent Licensed Products”) in the Territory.

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Under the License Agreement, the Company committed to pay Innovent a $5.0 million upfront payment and an aggregate of up to $40.0 million in milestone payments in connection with the achievement of certain development, regulatory and sales milestones with respect to the bevacizumab Licensed Product and, if the Company’s option was exercised, an aggregate of up to $40.0 million in milestone payments in connection with the achievement of certain development, regulatory and sales milestones with respect to the rituximab Licensed Product. The Company accounted for the licensing transaction as an asset acquisition under the relevant accounting rules. During the three months ended March 31, 2022 and 2021, the Company’s research and development expense related to bevacizumab Licensed Product development activities directly with Innovent was immaterial. As of March 31, 2022, the Company did not have any outstanding milestone or royalty payment obligations to Innovent.

On May 3, 2022, the Company provided notice of termination of the License Agreement to Innovent pursuant to Section 13.6 of the License Agreement. In connection therewith, the Company has discontinued development of the bevacizumab Licensed Product.

Bioeq

On November 4, 2019, the Company entered into a license agreement with Bioeq for the commercialization of a biosimilar version of ranibizumab (Lucentis) in certain dosage forms in both a vial and pre-filled syringe presentation (the “Bioeq Licensed Products”). Under this agreement, Bioeq granted to the Company an exclusive, royalty-bearing license to commercialize the Bioeq Licensed Products in the field of ophthalmology (and any other approved labelled indication) in the United States. Bioeq will supply to the Company the Bioeq Licensed Products in accordance with terms and conditions specified in the agreement and a manufacturing and supply agreement to be executed by the parties in accordance therewith. The agreement’s initial term continues in effect for ten years after the first commercial sale of a Bioeq Licensed Product in the United States, and thereafter renews for an unlimited period of time unless otherwise terminated in accordance with its terms.

Under the agreement, Bioeq must use commercially reasonable efforts to develop and obtain regulatory approval of the Bioeq Licensed Products in the United States in accordance with a development and manufacturing plan, and the Company must use commercially reasonable efforts to commercialize the Bioeq Licensed Products in accordance with a commercialization plan. Additionally, the Company must commit certain pre-launch and post-launch resources to the commercialization of the Bioeq Licensed Products for a limited time as specified in the agreement.

The Company accounted for the licensing transaction as an asset acquisition under the relevant accounting rules. The Company paid Bioeq an upfront and a milestone payment aggregating to €10 million ($11.1 million), which was recorded as research and development expense in the Company’s consolidated statement of operations in 2019. The Company is obligated to pay Bioeq an aggregate of up to €12.5 million in additional milestone payments in connection with the achievement of certain development and regulatory milestones with respect to the Bioeq Licensed Products in the United States. The Company will share a percentage of gross profits on sales of Bioeq Licensed Products in the United States with Bioeq in the low to mid fifty percent range. The additional milestone payments and royalties are contingent upon future events and, therefore, will be recorded when it is probable that a milestone will be achieved or when royalties are due. As of March 31, 2022, the Company did not have any outstanding obligations for milestones or royalties to Bioeq.

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7.       Debt Obligations

A summary of the Company’s debt obligations, including level within the fair value hierarchy, is as follows:

At March 31, 2022

(in thousands)

Principal
Amount

Unamortized Debt Discount and Debt Issuance Costs

Net
Carrying Value

Estimated
Fair Value

 

Level

Financial Liabilities:

  

  

  

  

  

2027 Term Loans

$

200,000

$

(4,151)

$

195,849

$

195,849

*

2026 Convertible Notes

$

230,000

$

(5,393)

$

224,607

$

228,275

Level 2

At December 31, 2021

(in thousands)

Principal
Amount

Unamortized Exit Fee, Debt Discount and Debt Issuance Costs

Net
Carrying Value

Estimated
Fair Value

 

Level

Financial Liabilities:

  

  

  

  

 

 

2026 Convertible Notes

$

230,000

$

(5,712)

$

224,288

$

271,860

Level 2

2022 Convertible Notes

$

109,000

$

(521)

$

108,479

$

108,361

Level 3

2025 Term Loan

$

75,000

$

513

$

75,513

$

75,513

*

*The principal amount outstanding is subject to a variable interest rate, which is based on the three-month LIBOR plus a fixed percentage. Therefore, the Company believes the carrying amount of these obligations approximates fair value.

2027 Term Loans

The Company entered into a loan agreement (the “Loan Agreement”) with BioPharma Credit, PLC, (as the “Collateral Agent”), BPCR Limited Partnership (as a “Lender”), and Biopharma Credit Investments V (Master) LP, acting by its general partner, BioPharma Credit Investments V GP LLC (as a “Lender”) that provides for a senior secured term loan facility of up to $300.0 million to be funded in four committed tranches: (i) a Tranche A Loan in an aggregate principal amount of $100.0 million (the “Tranche A Loan”) that was funded on January 5, 2022 (the “Tranche A Closing Date”); (ii) a Tranche B Loan in an aggregate principal amount of $100.0 million (the “Tranche B Loan”) that was funded on March 31, 2022; (iii) a Tranche C Loan in an aggregate principal amount of $50.0 million (the “Tranche C Loan”) to be funded at the Company’s option between April 1, 2022 and March 17, 2023, subject to certain conditions including the first FDA approval of a BLA for the Company’s product candidate toripalimab in the United States; and (iv) a Tranche D Loan in an aggregate principal amount of $50.0 million (the “Tranche D Loan” and, together with the Tranche A Loan, the Tranche B Loan, and the Tranche C Loan, the “2027 Term Loans”) to be funded at the Company’s option between April 1, 2022 and March 17, 2023, subject to certain conditions including the first FDA approval of a BLA for the Company’s product candidate CHS-201 (ranibizumab biosimilar) in the United States. The Company has the right to request an uncommitted additional facility amount of up to $100.0 million that is subject to new terms and conditions.

The 2027 Term Loans mature on either (i) the fifth anniversary of the Tranche A Closing Date; or (ii) October 15, 2025, if the outstanding aggregate principal amount of the Company’s 2026 Convertible Notes is greater than $50.0 million on October 1, 2025. The 2027 Term Loans bear interest at 8.25% plus three-month LIBOR per annum with a LIBOR floor of 1.0%. In the event of the cessation of LIBOR, the benchmark governing the interest rate will be replaced with a rate based on the secured overnight financing rate published by the Federal Reserve Bank of New York as described in the Loan Agreement. Interest is payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. Repayment of outstanding principal of the 2027 Term Loans will be made in five equal quarterly payments of principal commencing March 31, 2026.

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The Company adopted the prospective method to account for future cash payments. Under the prospective method, the effective interest rate is not constant, and any change in the expected cash flows is recognized prospectively as an adjustment to the effective yield.

The obligations under the Loan Agreement are secured pursuant to customary security documentation, including a guaranty and security agreement among the Credit Parties and the Collateral Agent which provides for a lien on substantially all of the Company’s tangible and intangible assets and property, including intellectual property.

Pursuant to the Loan Agreement, and subject to certain restrictions, proceeds of the 2027 Term Loans were and will be used to fund the Company’s general corporate and working capital requirements except for the following: in January 2022, proceeds of the Tranche A Loan were used to repay in full all amounts outstanding under the Company’s $75.0 million aggregate principal credit agreement with affiliates of Healthcare Royalty Partners (the “2025 Term Loan”), as well as all associated costs and expenses pursuant to which a payoff amount of $81.9 million was outstanding; in March 2022, proceeds of the Tranche B Loan were used to repay in full all amounts outstanding under the Company’s $100.0 million aggregate principal amount 8.2% Convertible Senior Notes (the “2022 Convertible Notes”), as well as all associated costs and expenses pursuant to which a payoff amount of $111.1 million was outstanding.

The Loan Agreement contains certain customary representations and warranties. In addition, the Loan Agreement includes affirmative covenants, such as the requirement to maintain minimum trailing twelve-month net sales in an amount that begins at $200.0 million for the quarter ending March 31, 2022, increases to $210.0 million for the quarter ended March 31, 2024, increases to $230.0 million for the quarter ending June 30, 2024, increases to $270.0 million for the quarter ending September 30, 2024, and increases to $300.0 million for the quarter ended December 31, 2024 and thereafter. Further, the Loan Agreement includes certain other affirmative covenants and negative covenants, including, covenants and restrictions that among other things, restrict the Company’s ability to incur liens, incur additional indebtedness, make investments, engage in certain mergers and acquisitions or asset sales, and declare dividends or redeem or repurchase capital stock. The Loan Agreement also contains customary events of default, including among other things, the Company’s failure to make any principal or interest payments when due, the occurrence of certain bankruptcy or insolvency events or its breach of the covenants under the Loan Agreement. Upon the occurrence of an event of default, the Lenders may, among other things, accelerate the Company’s obligations under the Loan Agreement. A change of control of the Company triggers a mandatory prepayment of the 2027 Term Loans within ten business days.

As of March 31, 2022, the Company was in full compliance with these covenants and there were no events of default under the 2027 Term Loans.

In connection with the closing of Tranche A, the Company incurred $7.8 million in debt discounts and issuance costs of which $6.8 million related to all the tranches of the 2027 Term Loans and was thus allocated pro rata between the funded and unfunded tranches. The debt discount and issuance costs allocated to Tranche A have been presented as a deduction to the 2027 Term Loan balance and are amortized into interest expense using the effective interest method. The $2.3 million allocated to Tranche B was fully amortized over the commitment period and recognized as interest expense in the first quarter of 2022. Until the unfunded Tranche C and Tranche D have been drawn, the associated debt discounts and issuance costs have been deferred as assets and amortized into interest expense using the straight-line method over the commitment period of the respective tranches. At the closing date of Tranche B on March 31, 2022, the Company incurred an additional $1.0 million in debt issuance costs which is presented as a deduction to the 2027 Term Loan balance. As of March 31, 2022, the remaining unamortized debt discount and debt offering costs related to Tranches A and B of $4.2 million will be amortized using the effective interest rate over the remaining term of 4.8 years. The overall effective interest rate for Tranches A and B was 9.8% as of March 31, 2022.

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The following table presents the components of interest expense related to the 2027 Term Loans:

    

Three Months Ended

March 31, 

(in thousands)

2022

Stated coupon interest

$

2,210

Amortization of debt discount and debt issuance costs, Tranche B

2,265

Amortization of debt discount and debt issuance costs, unfunded Tranches C and D

446

Amortization of debt discount and debt issuance costs, funded Tranche A

 

130

Total interest expense

$

5,051

Future payments on the 2027 Term Loans as of March 31, 2022 are as follows:

Year ending December 31, (in thousands)

Remainder of 2022 - interest only

$

14,158

2023 - interest only

18,757

2024 - interest only

 

18,808

2025 - interest only

 

18,757

2026 and thereafter

213,145

Total minimum payments

 

283,625

Less amount representing interest

 

(83,625)

2027 Term Loans, gross

 

200,000

Less unamortized debt discount and debt issuance costs, net

 

(4,151)

Net carrying amount of 2027 Term Loans

$

195,849

1.5% Convertible Senior Subordinated Notes due 2026

In April 2020, the Company issued and sold $230.0 million aggregate principal amount of its 1.5% Convertible Senior Subordinated notes due 2026 (the “2026 Convertible Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The net proceeds from the offering were $222.2 million after deducting initial purchasers’ fees and offering expenses. The 2026 Convertible Notes are general unsecured obligations and will be subordinated to the Company’s designated senior indebtedness (as defined in the indenture for the 2026 Convertible Notes) and structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables. The 2026 Convertible Notes accrue interest at a rate of 1.5% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, since October 15, 2020, and will mature on April 15, 2026, unless earlier repurchased or converted.

At any time before the close of business on the second scheduled trading day immediately before the maturity date, noteholders may convert their 2026 Convertible Notes at their option into shares of the Company’s common stock, together, if applicable, with cash in lieu of any fractional share, at the then-applicable conversion rate. The initial conversion rate is 51.9224 shares of common stock per $1,000 principal amount of the 2026 Convertible Notes, which represents an initial conversion price of approximately $19.26 per share of common stock. The initial conversion price represents a premium of approximately 30.0% over the last reported sale of $14.815 per share of the Company’s common stock on the Nasdaq Global Market on April 14, 2020, the date the 2026 Convertible Notes were issued. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. If a “make-whole fundamental change” (as defined in the indenture for the 2026 Convertible Notes) occurs, the Company will, in certain circumstances, increase the conversion rate for a specified period of time for noteholders who convert their 2026 Convertible Notes in connection with that make-whole fundamental change. The 2026 Convertible Notes are not redeemable at the Company’s election before maturity. If a “fundamental change” (as defined in the indenture for the 2026 Convertible Notes) occurs, then, subject to a limited exception, noteholders may require the Company to repurchase their 2026 Convertible Notes for cash. The repurchase price will be equal to the principal amount of the 2026

20

Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date.

The 2026 Convertible Notes have customary provisions relating to the occurrence of “events of default” (as defined in the Indenture for the 2026 Convertible Notes). The occurrence of such events of default could result in the acceleration of all amounts due under the 2026 Convertible Notes.

As of March 31, 2022, the Company was in full compliance with these covenants and there were no events of default under the 2026 Convertible Notes.

The Company evaluated the features embedded in the 2026 Convertible Notes under the relevant accounting rules and concluded that the embedded features do not meet the requirements for bifurcation, and therefore do not need to be separately accounted for as an equity component. The proceeds received from the issuance of the convertible debt were recorded as a liability on the condensed consolidated balance sheets.

Capped Call Transactions

In connection with the pricing of the 2026 Convertible Notes, the Company also paid $18.2 million to enter into privately negotiated capped call transactions with one or a combination of the initial purchasers, their respective affiliates and other financial institutions (the “option counterparties”). The capped call transactions are generally expected to reduce the potential dilution upon conversion of the 2026 Convertible Notes in the event that the market price per share of the Company’s common stock, as measured under the terms of the capped call transactions, is greater than the strike price of the capped call transactions, which initially corresponds to the conversion price of the 2026 Convertible Notes, and is subject to anti-dilution adjustments generally similar to those applicable to the conversion rate of the 2026 Convertible Notes. The cap price of the capped call transactions will initially be $25.9263 per share, which represents a premium of approximately 75.0% over the last reported sale price of the Company’s common stock of $14.815 per share on April 14, 2020, and is subject to certain adjustments under the terms of the capped call transactions.

The capped call transactions are accounted for as separate transactions from the 2026 Convertible Notes and classified as equity instruments; thus, they are recorded as a reduction to additional paid-in capital on the consolidated balance sheets. The capped calls will not be subsequently re-measured as long as the conditions for equity