Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K (“Form 10-K”). This Form 10-K, including the following sections, contains forward-looking statements within the meaning of the federal securities laws. 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. For a detailed discussion
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of these risks and uncertainties, see the “Risk Factors” section in Item 1A of this Form 10-K. 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 Form 10-K. We undertake no obligation to update forward-looking statements, which reflect events or circumstances occurring after the date of this Form 10-K.
This MD&A section generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 25, 2021.
Overview
We are a commercial-stage biopharmaceutical company focused on the research, development and commercialization of innovative immunotherapies to treat cancer. Our strategy is to build a leading immuno-oncology franchise funded with cash generated through net sales of our diversified portfolio of FDA-approved therapeutics.
Our commercial portfolio includes two FDA-approved biologics. Our first product, UDENYCA, a biosimilar to Neulasta, a long-acting granulocyte-colony stimulating factor, was launched commercially in the United States in January 2019. In December 2021, the FDA-approved YUSIMRY, formerly CHS-1420, our Humira biosimilar product, which we plan to launch in the United States on or after July 1, 2023, per the terms of an agreement with Humira manufacturer, AbbVie. In addition to our two FDA-approved biologics, we also have two additional product candidates in the late stage of review with the FDA, toripalimab and CIMERLI, a Lucentis biosimilar candidate. The PDUFA action date for the toripalimab BLA is April 30, 2022, and if approved, we are planning to launch toripalimab in the United States following approval. In 2021, our partner Bioeq, submitted to the FDA a BLA for CIMERLI. The FDA has accepted the application for filing and set a target action date of August 2022. If approved, we expect CIMERLI commercial launch following approval, depending on importation timing with the United States Customs. We are also conducting a pharmacokinetic study to facilitate a potential Section 351(k) BLA seeking FDA approval for CHS-305, an Avastin biosimilar candidate. We have built an experienced and robust oncology market access, key account management and medical affairs capability in the United States, supporting the successful commercialization of UDENYCA. We expect to leverage these capabilities as we build and launch our immuno-oncology franchise.
2027 Term Loans
In January 2022, we entered into a Loan Agreement that provides for a senior secured term loan facility of up to $400.0 million (inclusive of a $100.0 million uncommitted additional facility amount) to be funded in four committed tranches: (i) a Tranche A Loan in an aggregate principal amount of $100.0 million that was funded on January 5, 2022; (ii) a Tranche B Loan in an aggregate principal amount of $100.0 million to be funded no later than April 1, 2022, subject to the delivery of evidence of repayment, repurchase or redemption of indebtedness outstanding under our 8.2% Convertible Notes due March 2022 and certain customary deliverables; (iii) a Tranche C Loan in an aggregate principal amount of $50.0 million to be funded at the our option between April 1, 2022 and March 17, 2023, subject to certain conditions including the first FDA approval of a BLA for our product candidate toripalimab in the United States; and (iv) a Tranche D Loan in an aggregate principal amount of $50.0 million to be funded at our option between April 1, 2022 and March 17, 2023, subject to certain conditions including the first FDA approval of a BLA for our product candidate CHS-201 (ranibizumab biosimilar) in the United States. We have the right to request an uncommitted additional facility amount of up to $100.0 million. The 2027 Term Loans mature in 2027.
In January 2022, we used funds from the Tranche A Loan to voluntarily prepay all amounts outstanding under the 2025 Term Loan. (See “Note 14. Subsequent Events” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K for additional details). We expect to use proceeds from the Tranche B Loan to fully redeem the outstanding 2022 Convertible Notes due in March 2022.
Junshi Biosciences – TIGIT Option Exercises
In January 2022, we initiated the process for the exercise of our option to license JS006, a TIGIT-targeted antibody, in the United States and Canada from Junshi Biosciences, expanding our 2021 immuno-oncology collaboration agreement. We will lead further development of JS006 and will be responsible for the associated development costs as set forth in the Collaboration Agreement. Antibodies blocking TIGIT (T cell immunoglobulin and ITIM domain) have shown potential for enhanced anti-tumor activity in combination with PD-1/PD-L1 inhibitors. In preclinical studies, JS006 demonstrated strong binding affinity and inhibition of the TIGIT pathway. A dose escalation, dose expansion clinical trial (clinicaltrials.gov identifier# NCT05061628) evaluating the safety, tolerability and pharmacokinetic
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properties of JS006 as monotherapy and in combination with PD-1 inhibitor toripalimab in patients with advanced solid tumors is ongoing in China. The FDA has cleared an IND allowing clinical trials of JS006 in the United States, and we plan to advance toripalimab in combination with JS006 in a clinical trial in North America later in 2022.
JS006 has emerged as a promising novel immuno-oncology agent that can potentially be used in combination with PD-L1 agents to improve upon the durable clinical antitumor activity of current PD-L1 regimens. Moreover, a JS006 and PD-L1 combination could be practice changing in numerous tumor settings by providing a chemotherapy free option, thereby improving upon the safety profile of current regimens. Our current hypothesis is that the TIGIT class of agents could be effective in the same tumor types and settings where PD-L1 therapies have proven efficacy, but with a potentially better safety profile than chemotherapy containing PD-L1 regimens or a broader patient population, and as such, the market potential for this class of agents is likely to be as large, or larger, than that of PD-L1 therapies.
Products and Product Candidates
Our portfolio includes the following products and product candidates:
Oncology
● Toripalimab is being developed for its ability to block PD-1 interactions with its ligands, PD-L1 and PD-L2 by binding to the FG loop on the PD-1, and for enhanced PD-1 receptor internalization (endocytosis function). We believe blocking PD-1 interactions with PD-L1 and PD-L2 can help to promote the immune system’s ability to attack and kill tumor cells. More than thirty company-sponsored toripalimab clinical studies covering more than fifteen indications have been conducted globally by our partner Junshi Biosciences, including in China, the United States, Southeast Asia, and European countries.
Together with Junshi Biosciences, in the third quarter of 2021 we completed the submission of the toripalimab BLA to the FDA seeking approval for the use of toripalimab in combination with gemcitabine and cisplatin for first-line treatment of adults with metastatic or recurrent locally advanced NPC, and for use as a monotherapy in the second- or later-line treatment of patients with recurrent unresectable or metastatic NPC that have progressed on or after a platinum-containing chemotherapy and the FDA granted the BLA Priority Review with a target action date of April 30, 2022. We believe there is a high unmet need in NPC based on the current FDA-approved treatment alternatives and the lack of any approved immmunotherapies.
The FDA has granted Breakthrough Therapy designation to toripalimab for the treatment of patients with recurrent or metastatic NPC with disease progression on or after platinum-containing chemotherapy and for toripalimab in combination with chemotherapy (gemcitabine and cisplatin) for the first line treatment of recurrent or metastatic NPC. The FDA has also granted toripalimab Fast Track designation for the treatment of mucosal melanoma and orphan drug designations for treatment of NPC, mucosal melanoma soft tissue sarcoma, and esophageal cancer.
In addition to NPC, we plan to submit supplemental BLAs to the FDA for toripalimab within the next two years for the treatment of rare and highly prevalent cancers.
● JS006 is an investigational recombinant humanized IgG4κ monoclonal antibody designed to act specifically against human TIGIT. A number of preclinical and clinical studies have demonstrated that activation of the TIGIT pathway could be a crucial underlying mechanism for tumor immune evasion and resistance to PD-1 blockade therapy. Combination of TIGIT and PD-1/PD-L1 antibodies showed a synergistic potential to enhance antitumor response, to overcome anti-PD-1 resistance and possibly broaden the cancer patient population that can benefit from immunotherapy.
A dose escalation, dose expansion clinical trial (clinicaltrials.gov identifier# NCT05061628) evaluating the safety, tolerability and pharmacokinetic properties of JS006 as monotherapy and in combination with PD-1 inhibitor toripalimab in patients with advanced solid tumors is ongoing in China. The FDA has cleared an IND allowing clinical trials of JS006 in the United States, and we plan to advance toripalimab in combination with JS006 in a clinical trial in North America later in 2022.
● UDENYCA is a biosimilar to Neulasta, a long-acting granulocyte colony stimulating factor (G-CSF). We launched UDENYCA commercially in the United States in January 2019 following approval by the FDA in November 2018. In 2021 we recorded net sales of UDENYCA of $326.6 million. We are also developing an additional presentation of UDENYCA: a proprietary OBI, in
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addition to the currently marketed pre-filled syringe presentation. In October 2021, we announced positive results from a randomized, open-label, crossover study assessing the pharmacokinetic and pharmacodynamic bioequivalence of UDENYCA administered via OBI compared to UDENYCA PFS. We are planning a 2022 submission to the FDA of a prior approval supplement to seek marketing authorization for the UDENYCA OBI.
● CHS-305, a bevacizumab (Avastin) biosimilar candidate. In January 2020, we entered into a license agreement with Innovent for the development and commercialization of a biosimilar version of bevacizumab (Avastin) in any dosage form and presentations in the United States and Canada. We are conducting a three-way PK study using Avastin drug products from the United States, Avastin drug products from China and Innovent’s biosimilar to bevacizumab, as well additional analytical similarity exercises. We, together with our partner Innovent, are assessing the commercial feasibility of CHS-305.
Immunology
● YUSIMRY (adalimumab-aqvh), is a biosimilar of Humira, a monoclonal antibody that can bind to TNF. YUSIMRY provides certain therapeutic benefits for treatment of patients with certain inflammatory diseases characterized by increased production of TNF in the body, including rheumatoid arthritis, juvenile idiopathic arthritis, psoriatic arthritis, ankylosing spondylitis, Crohn’s disease, psoriasis and ulcerative colitis. In December 2021, the FDA approved YUSIMRY, which we plan to launch in the United States on or after July 1, 2023, per the terms of an agreement with Humira manufacturer, AbbVie Inc.
Ophthalmology
● CIMERLI , formerly known as CHS-201, a ranibizumab (Lucentis) biosimilar candidate . In November 2019, we entered into a license agreement with Bioeq for the commercialization of CHS-201, a biosimilar version of ranibizumab (Lucentis) in certain dosage forms in both a vial and PFS presentation. Under this agreement, Bioeq granted to us an exclusive royalty-bearing license to commercialize CHS-201 in the field of ophthalmology (and any other approved labelled indication) in the United States.
● Bioeq submitted a Section 351(k) BLA for CIMERLI to the FDA in the third quarter of 2021. The FDA has accepted the CIMERLI BLA for review and assigned an August 2022 target action date.
License Agreement with Junshi Biosciences
On February 1, 2021, we entered into an Exclusive License and Commercialization 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, we paid $150.0 million upfront for exclusive rights to toripalimab in the United States and Canada, options in these territories to Junshi Biosciences’ anti-TIGIT antibody JS006 and next-generation engineered IL-2 cytokine, and certain negotiation rights to two undisclosed preclinical immuno-oncology drug candidates. We will have the right to conduct all commercial activities of toripalimab in the United States and Canada. We 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.
In January 2022, we took steps that we expect will result in the payment to Junshi Biosciences of an additional $35.0 million upon the closing of the exercise of our option to license JS006, a TIGIT-targeted antibody, in the United States and Canada. We will lead further development of JS006 and will be responsible for the associated development costs as set forth in the Collaboration Agreement. If we exercise our remaining option for the IL-2 cytokine, we will be obligated to pay an additional option exercise fee of $35.0 million. Additionally, for each exercised option, we 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 milestones, including up to $170.0 million for attainment of certain sales thresholds. Under the Collaboration Agreement, we retain the right to collaborate in the development of toripalimab and the other licensed compounds 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, we are responsible for certain associated regulatory and technology transfer costs for toripalimab and other licensed compounds and will reimburse Junshi Biosciences for such costs. We recognized research and development expense of $39.4 million in the consolidated statement of operations for year ended December 31, 2021, and had $1.9 million recorded in accrued and other current
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liabilities on the consolidated balance sheet as of December 31, 2021 related to the co-development, regulatory and technology transfer costs.
We accounted for the licensing transaction as an asset acquisition under the relevant accounting rules. We recorded research and development expense of $145.0 million during the first quarter of 2021, related to an upfront payment for exclusive rights to toripalimab in the United States and Canada. We had entered into a Right of First Negotiation agreement with Junshi Biosciences and paid a fee of $5.0 million which was 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 December 31, 2021, we did not have any outstanding milestone or royalty payment obligations to Junshi Biosciences. The $35.0 million payment for the option to license JS006 will be reflected in our first quarter 2022 financial statements. The additional milestone payments, option fees and royalties are contingent upon future events and, therefore, will be recorded when it is probable that a milestone will be achieved, option fees will be incurred or when royalties are due.
In connection with the Collaboration Agreement, we entered into a 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, we issued 2,491,988 unregistered shares of our common stock to Junshi Biosciences, at a price per share of $20.0643, 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 years period following its effective date. The Collaboration Agreement and the Stock Purchase Agreement were negotiated concurrently and were therefore evaluated as a single agreement. We used the “Finnerty” and “Asian put” valuation models and determined the fair value for the discount for lack of marketability to be $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 consolidated statement of operations for the year ended December 31, 2021.
COVID-19 Update
As a result of the COVID-19 pandemic, we have experienced and may continue to experience disruptions that could severely impact our business, clinical trials and preclinical studies. See “Risk Factors – Risks Related to COVID-19.” These and other factors arising from the COVID-19 pandemic could result in us not being able to maintain UDENYCA’s market position or increase its penetration against all Neulasta’s dosage forms and could result in our inability to meet development or regulatory milestones for our product candidates, each of which would harm our business, financial condition, results of operations and growth. Until the COVID-19 pandemic is controlled, we expect it may continue to adversely impact our sales growth. In addition, the spread of more contagious and/or deadly variants, such as the Delta or omicron variants, could cause the COVID-19 pandemic to last longer than expected and could result in the reinstatement of restrictive orders that could disrupt our business.
While the long-term economic impact and the duration of the COVID-19 pandemic may be difficult to assess or predict, the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, which could reduce our ability to access capital and could negatively affect our liquidity and the liquidity and stability of markets for our common stock and our convertible notes. In addition, a recession, market correction or depression resulting from the spread of COVID-19 could materially affect our business and the value of our notes and our common stock.
Financial Operations Overview
Revenue
Our first FDA-approved product, UDENYCA, was approved in November 2018, and we initiated United States sales of UDENYCA on January 3, 2019. In December 2021, the FDA-approved YUSIMRY, which we plan to launch in the United States on or after July 1, 2023, per the terms of an agreement with Humira manufacturer, AbbVie. Net revenues from sales of UDENYCA were $326.6 million and $475.8 million in 2021 and 2020, respectively.
Cost of Goods Sold
Cost of goods sold consists primarily of third-party manufacturing, distribution, and certain overhead costs. Prior to the second quarter of 2021, a portion of the costs of producing UDENYCA sold was expensed as research and development before the FDA approval
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of UDENYCA and therefore is not reflected in cost of goods sold. All the inventory expensed prior to approval of UDENYCA was fully utilized by March 31, 2021; thus, the costs of producing UDENYCA are fully reflected in cost of goods sold beginning April 1, 2021. On May 2, 2019, we settled a trade secret action brought by Amgen. As a result, cost of goods sold reflects a mid-single digit royalty on net product revenue, which began July 1, 2019 and continues for five years from then.
For the years ended 2021 and 2020, cost of goods sold included write-offs for inventory that did not meet our acceptance criteria, net of credits received from the manufacturers, of $5.1 million and $2.2 million, respectively.
Research and Development Expense
Research and development expense represents costs incurred to conduct research, such as the discovery and development of our product candidates. We recognize all research and development costs as they are incurred. We currently track research and development costs incurred on a product candidate basis only for external research and development expenses. Our external research and development expense consists primarily of:
● expense incurred under agreements with consultants, third-party CROs, and investigative sites where a substantial portion of our preclinical studies and all of our clinical trials are conducted;
● costs of acquiring originator comparator materials and manufacturing preclinical study and clinical trial supplies and other materials from CMOs, and related costs associated with release and stability testing;
● costs associated with manufacturing process development activities; and
● upfront and milestone payments related to licensing and collaboration agreements.
Internal costs are associated with activities performed by our research and development organization and generally benefit multiple programs. These costs are not separately allocated by product candidate. Unallocated, internal research and development costs consist primarily of:
● personnel-related expense, which include salaries, benefits and stock-based compensation; and
● facilities and other allocated expense, which include direct and allocated expense for rent and maintenance of facilities, depreciation and amortization of leasehold improvements and equipment, laboratory and other supplies.
The largest component of our total operating expense has historically been our investment in research and development activities, including the clinical development and manufacturing process development of our product candidates.
Products manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. For all the periods presented, we expensed manufacturing costs as incurred as research and development expense for products that had not been approved. We began to capitalize inventory costs associated with UDENYCA after receiving regulatory approval in November 2018.
The process of conducting the necessary clinical research to obtain regulatory approval is costly and time consuming. Furthermore, in the past, we have entered into collaborations with third parties to participate in the development and commercialization of our product candidates, and we may enter into additional collaborations in the future. In situations in which third parties have substantial influence over the development activities for product candidates, the estimated completion dates are not fully under our control. For example, our partners in licensed territories may exert considerable influence on the regulatory filing process globally. Therefore, we cannot forecast with any degree of certainty the duration and completion costs of these or other current or future clinical trials of our product candidates. We may never succeed in achieving regulatory approval for any of our pipeline product candidates. In addition, we may enter into other collaboration arrangements for our other product candidates, which could affect our development plans or capital requirements.
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The following table summarizes our research and development expense incurred during the respective periods:
Development Status as of
Year ended December 31,
(in thousands)
December 31, 2021
2021
2020
External costs incurred by product candidate:
UDENYCA
Approved (1)
$
39,026
$
14,008
YUSIMRY
Approved (2)
48,326
25,048
CHS-2020
Discontinued (3)
11,211
19,249
CHS-131
Discontinued (4)
343
1,470
Bevacizumab (Avastin) biosimilar product candidate licensed from Innovent
Pivotal Clinical Trials (5)
9,051
3,523
Toripalimab
Pivotal Clinical Trials (6)
43,368
—
Junshi Biosciences upfront payment and right of first negotiation fee
136,000
5,000
Innovent upfront and milestone based license fee payments
—
7,500
Other research and development expenses (7)
4,952
4,635
Internal costs
70,828
62,326
Total research and development expenses
$
363,105
$
142,759
(1) Costs related primarily to the development of additional presentations of UDENYCA.
(2) YUSIMRY, formerly CHS-1420, was approved by the FDA in December 2021.
(3) We announced discontinuation of the development of CHS-2020 in February 2021.
(4) We are currently seeking strategic alternatives for CHS-131 and development was discontinued in 2021.
(5) A 3-way pharmacokinetics clinical trial must be successfully completed before BLA and prior approval supplement (“PAS”) filings can be submitted for approval.
(6) The FDA has granted Priority Review for the toripalimab BLA, as well as Breakthrough Therapy Designation for toripalimab for the treatment of NPC, and set a PDUFA action date for April 30, 2022. Toripalimab is being evaluated in late-stage clinical trials for the treatment of a broad range of tumor types including cancers of the lung, nasopharynx, esophagus, stomach, bladder, breast, liver, kidney and skin. Within the next several years, if toripalimab is approved, we anticipate submitting BLA supplements for multiple additional indications, including for rare and more prevalent cancers.
(7) Amount consists of costs for other pipeline candidates, including CIMERLI.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of personnel costs, allocated facilities costs and other expense for outside professional services, including legal, insurance, human resources, outside marketing, advertising, audit and accounting services, as well as costs associated with establishing commercial capabilities in support of the commercialization of UDENYCA. Personnel costs consist of salaries, benefits and stock-based compensation.
Interest Expense
Interest expense consists primarily of interest incurred on our outstanding indebtedness and non-cash interest related to the amortization of debt discount and debt issuance costs associated with our outstanding debt agreements.
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Results of Operations
Comparison of Years Ended December 31, 2021 and 2020
Revenue
Year Ended December 31,
(in thousands)
2021
2020
Change
Net revenue
$
326,551
$
475,824
$
(149,273)
The decrease in net revenue was primarily due to a decrease in the number of UDENYCA units sold and a decline in net realized price due to increased competition and COVID-19 impacts. Our net revenue and market penetration may continue to be adversely impacted by the COVID-19 pandemic and is subject to pricing trends and competitive dynamics in the overall pegfilgrastim market.
We expect our net revenue to decrease during 2022, as a result of increased competition for UDENYCA, with the potential for such decreases to be slightly offset by new product launches, if FDA approval is obtained.
Cost of Goods Sold
Year Ended December 31,
(in thousands)
2021
2020
Change
Cost of goods sold
$
57,591
$
37,667
$
19,924
Gross margin
82
%
92
%
The increase in cost of goods sold was primarily because a portion of the costs of producing UDENYCA sold through the first quarter of 2021 was expensed as research and development prior to the FDA approval of UDENYCA and, therefore, was not reflected in the cost of goods sold. During the first quarter of 2021, the UDENYCA inventory with no inventory value was fully utilized, and since then cost of goods sold fully reflects per unit acquisition cost of UDENYCA. The cost basis of product sold that was expensed prior to approval, was $3.3 million and $21.1 million in 2021 and 2020, respectively. Had such inventories been valued at acquisition cost, it would have resulted in corresponding increases in cost of goods sold and corresponding decreases in gross margin. In addition, cost of goods sold included write-offs for inventory that did not meet our acceptance criteria, net of credits received from the manufacturers, of $5.1 million and $2.2 million in 2021 and 2020, respectively. The increase in cost of goods sold was partially offset by a reduction in the number of units of UDENYCA sold in 2021 compared to 2020, which also resulted in lower royalty costs of $7.3 million.
We expect our gross margin to decrease during 2022 as a result of declining net realized price per unit sold and higher average annual costs per unit sold due primarily to the transition in the first quarter of 2021 from inventory with manufacturing costs that were partly recognized as research and development expenses prior to the regulatory approval of UDENYCA.
Research and Development Expense
Year Ended December 31,
(in thousands)
2021
2020
Change
Research and development
$
363,105
$
142,759
$
220,346
The increase in research and development expense was primarily due to:
● higher license fees in 2021, including $145.0 million in expense pursuant to the Collaboration Agreement with Junshi Biosciences which was partially offset by a $9.0 million credit related to the fair value of the DLOM on the common shares
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purchased under the Stock Purchase Agreement, as compared to 2020 which included $7.5 million paid to Innovent in upfront and milestone-based license fees and $5.0 million paid to Junshi Biosciences as a Right of First Negotiation fee;
● an increase of $43.4 million of co-development, regulatory, and technology transfer costs for toripalimab, of which $39.4 million were reimbursements directly to Junshi Biosciences pursuant to the Collaboration Agreement with Junshi Biosciences;
● an increase of $25.0 million related to the development of additional presentations of UDENYCA;
● an increase of $23.3 million related to YUSIMRY mainly due to costs associated with FDA pre-approval inspections and scaling up process performance qualification production runs;
● an increase of $5.5 million in costs incurred for the continued development of bevacizumab (Avastin) biosimilar product candidate licensed from Innovent in 2020;
● an increase of $4.9 million in stock-based compensation expense primarily related to the grant of fully vested stock options to certain employees and consultants upon the execution of the Collaboration Agreement with Junshi Biosciences and additional equity awards granted in 2021; and
● an increase of $3.4 million in personnel and consulting costs to advance our research and development programs.
The increase was partially offset by:
● a decrease of $8.0 million in costs related to CHS-2020 due to the discontinuation of its development in the first quarter of 2021; and
● a decrease of $1.1 million in costs related to CHS-131 due to the discontinuation of its development in 2021.
We expect our research and development expense in 2022 to be lower than in 2021 because 2021 included an exceptional license expense in the form of the $136.0 million expense related to the upfront license payment to Junshi Biosciences, which were partially offset by the $35.0 million payment expected to be made in 2022 for the option to license JS006, potential milestone payments related to our product candidates and other incremental development costs.
Selling, General and Administrative Expense
Year Ended December 31,
(in thousands)
2021
2020
Change
Selling, general and administrative
$
169,713
$
139,079
$
30,634
The increase in selling, general and administrative expense was primarily due to the following:
● a net increase of $18.3 million for personnel, consulting, professional services, marketing, advertising and other related expenses due to an increase in sales force personnel and related commercial functions to support our product sales;
● an increase of $7.8 million in stock-based compensation expense mainly related to the grant of fully vested stock options to certain employees and consultants upon the execution of the Collaboration Agreement with Junshi Biosciences and additional equity awards granted in 2021;
● an increase of $3.2 million in facilities, supplies and materials and other infrastructure related expenses to support our commercial infrastructure for our products ; and
● an increase of $1.2 million in 2021 travel expenses as a result of curtailed travel in 2020 due to the shelter-in-place response to COVID-19.
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We expect our selling, general and administrative expense in 2022 to be higher than in 2021 as a result of anticipated increased commercial activities to support UDENYCA sales and potential initiation of our ophthalmology and immuno-oncology commercial activities if any additional product candidates are approved.
Interest Expense
Year Ended December 31,
(in thousands)
2021
2020
Change
Interest expense
$
22,959
$
21,166
$
1,793
The increase in interest expense was primarily due to the interest expense related to our 2026 Convertible Notes that were issued in April 2020.
Income Tax Provision
Year Ended December 31,
(in thousands)
2021
2020
Change
Income tax provision
$
—
$
3,463
$
(3,463)
There was no income tax provision for the year ended December 31, 2021 due to our tax loss for 2021 and the tax effect of the valuation allowance against the deferred tax assets. Income tax expense of $3.5 million for the year ended December 31, 2020, primarily related to state taxes in jurisdictions outside of California, for which we have a limited operating history. We maintain a full valuation allowance against our net deferred tax assets due to our history of losses.
Liquidity and Capital Resources
Certain relevant measures of our liquidity and capital resources are summarized as follows:
December 31,
(in thousands)
2021
2020
Financial assets
Total Cash, cash equivalents and marketable securities
$
417,195
$
541,158
Debt obligations:
2025 Term Loan
$
75,513
(1)
$
74,481
2022 Convertible Notes
108,479
(1)
106,513
2026 Convertible Notes
224,288
223,029
Total debt obligations
$
408,280
$
404,023
(1) Subject to a refinancing per the terms of the 2027 Term Loans entered into in January 2022, discussed further below and also see “Note 14. Subsequent Events” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
Although we were profitable in 2020 and 2019, due to our research and development expenditures and decline in revenue in 2021, we have generated significant operating losses in all other years since our inception, including the year ended December 31, 2021. We have funded our operations primarily through sales of our common stock, issuance and incurrence of convertible and term debt and sales of UDENYCA.
As of December 31, 2021, we had an accumulated deficit of $1.0 billion and cash, cash equivalents, and marketable securities of $417.2 million. We believe that our available cash, cash equivalents, marketable securities and cash collected from UDENYCA sales will be sufficient to fund our planned expenditures and meet our obligations for at least the twelve months following our financial statement issuance date. In making this estimate, we considered the following significant events that occurred or were expected to occur after December 31, 2021 and are discussed further below and elsewhere in t his Annual Report on Form 10-K :
● payment of the $81.9 million payoff amount to the lenders of the 2025 Term Loan in January 2022;
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● the receipt of the net proceeds of $92.7 million from the Tranche A Loan of the 2027 Term Loans received by us in January 2022;
● the expected receipt of the net proceeds of the Tranche B Loan of the 2027 Term Loans which is expected to be funded no later than April 1, 2022, subject to the delivery of certain customary deliverables;
● repayment, repurchase or redemption in cash, in full, of our 2022 Convertible Notes as well as all associated costs and expenses; and
● the expected payment to Junshi Biosciences of $35.0 million for the fee to exercise the license option for the TIGIT Program in the first quarter of 2022.
We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we may enter into additional agreements with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated research and development activities, and on-going and future licensing and collaboration obligations. We may need to raise additional funds in the future; however, there can be no assurance that such efforts will be successful or that, if they are successful, the terms and conditions of such financing will be favorable. Our future funding requirements will depend on many factors, including the following:
● cash proceeds from product sales;
● the costs of manufacturing, distributing and marketing our products;
● the cost of manufacturing clinical supplies and any products that we may develop;
● the terms and timing of any other collaborative, licensing and other arrangements that we have established or may establish;
● the timing, receipt and amount of sales, profit sharing or royalties, if any, from any product candidates that are approved in the future;
● the number and characteristics of product candidates that we pursue;
● the scope, rate of progress, results and cost of our clinical trials, preclinical testing and other related activities;
● the costs of acquiring originator comparator materials and manufacturing preclinical study and clinical trial supplies and other materials from CMOs and related costs associated with release and stability testing;
● the cost, timing and outcomes of regulatory approvals;
● the cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
● the extent to which we acquire or invest in businesses, products or technologies; and
● the costs of the impact from the COVID-19 pandemic.
For further discussion of risks related to our financial condition and capital requirements, please see “Risk Factors— Risks Related to Our Financial Condition and Capital Requirements.”
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Financing arrangements
2025 Term Loan
As of December 31, 2021 the carrying amount of our $75.0 million aggregate principal amount credit agreement (the “2025 Term Loan”) with affiliates of Healthcare Royalty Partners was $75.5 million. In January 2022, the Company used proceeds from a separate borrowing, Tranche A Loan of the 2027 Term Loans, to voluntarily prepay all amounts outstanding under the 2025 Term Loan, pursuant to which a payoff amount including all costs and fees of $81.9 million was outstanding. See “Note 7. Debt Obligations” and “Note 14. Subsequent Events” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
2022 Convertible Notes
As of December 31, 2021, the carrying amount of our $100.0 million aggregate principal amount convertible senior notes due 2022 was $108.5 million, inclusive of a 9% premium due at maturity or redemption, if not earlier converted. In the first quarter of 2022, we expect to refinance the 2022 Convertible Notes with proceeds from a separate borrowing, Tranche B Loan of the 2027 Term Loans, which is to be funded no later than April 1, 2022, subject to the delivery certain customary deliverables. See “Note 7. Debt Obligations” and “Note 14. Subsequent Events” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
The 2022 Convertible Notes accrue interest at 8.2% per annum payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, and will mature on March 31, 2022, unless earlier redeemed, repurchased or converted at the option of holders. The conversion rate, which is subject to customary adjustments upon the occurrence of certain events, is 44.7387 shares of common stock per $1,000 principal amount of 2022 Convertible Notes, or approximately $22.35 per share. This initial conversion price represents a premium of approximately 74% over the closing price of $12.83 per share of our common stock on the Nasdaq Global Market on February 11, 2022. The 2022 Convertible Notes are redeemable in whole, and not in part, at our option, if the last reported sale price per share of common stock exceeds 160% of the conversion price on 20 or more trading days during the 30 consecutive trading days preceding the date on which the Company sends notice of such redemption to the holders of the 2022 Convertible Notes.
2026 Convertible Notes
As of December 31, 2021, the carrying amount of our $230.0 million aggregate principal amount convertible senior subordinated notes due 2026 was $224.3 million. 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, and will mature on April 15, 2026, unless earlier repurchased or converted at the option of holders. The conversion rate, which is subject to customary adjustments upon the occurrence of certain events, is 51.92 shares of common stock per $1,000 principal amount of 2026 Convertible Notes, or approximately $19.26 per share. This initial conversion price represents a premium of approximately 50% over the closing price of $12.83 per share of our common stock on the Nasdaq Global Market on February 11, 2022. The 2026 Convertible Notes are not redeemable at our election before maturity.
In connection with the pricing of the 2026 Convertible Notes, we entered into privately negotiated capped call transactions with certain of the initial purchasers of the 2026 Convertible Notes and other financial institutions. The cap price of the capped call transactions, which is subject to certain adjustments under the terms of the capped call transactions, is the initial amount of $25.93 per share, which represents a premium of approximately 102% over the last reported sale price of our common stock of $12.83 per share on February 11, 2022. See “Note 7. Debt Obligations” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K for additional details.
2027 Term Loans (Subsequent Event)
In January 2022, we entered into the 2027 Term Loans which provide for a senior secured term loan facility of up to $400.0 million (inclusive of a $100.0 million uncommitted additional facility amount) to be funded in four committed tranches: (i) a Tranche A Loan in an aggregate principal amount of $100.0 million that was funded on January 5, 2022; (ii) a Tranche B Loan in an aggregate principal amount of $100.0 million to be funded no later than April 1, 2022, subject to the delivery of evidence of repayment, repurchase or redemption of indebtedness outstanding under our 2022 Convertible Notes and certain customary deliverables; (iii) a Tranche C Loan in an aggregate principal amount of $50.0 million to be funded at our option between April 1, 2022 and March 17, 2023, subject to certain conditions including the first FDA approval of a BLA for our product candidate CHS-007 (toripalimab) in the United States; and (iv) a Tranche D Loan
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in an aggregate principal amount of $50.0 million to be funded at our option between April 1, 2022 and March 17, 2023, subject to certain conditions including the first FDA approval of a BLA for our product candidate CHS-201 (ranibizumab biosimilar) in the United States. After Tranche A was funded on January 5, 2022, we gained the right to request an uncommitted additional facility amount of up to $100.0 million that would be subject to new terms and conditions.
The 2027 Term Loans mature on either (i) January 5, 2027; or (ii) October 15, 2025, if the outstanding aggregate principal amount of our 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 1.00%. 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 2027 Term Loans agreement. Interest is payable quarterly in arrears. Repayment of outstanding principal of the 2027 Term Loans will be made in five equal quarterly payments of principal commencing after January 5, 2026.
In January 2022, we paid to the Lenders of the 2027 Term Loans $6.0 million for a funding fee equal to 2.00% of the Lenders’ total committed amount to fund the Tranche A Loan, Tranche B Loan, Tranche C Loan and Tranche D Loan.
Pursuant to the 2027 Term Loans agreement, and subject to certain restrictions, proceeds of the 2027 Term Loans were and will be used to fund our 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 2025 Term Loan, as well as all associated costs and expenses pursuant to which a payoff amount of $81.9 million was outstanding; and proceeds of the Tranche B Loan will be used at our option to repay, repurchase or redeem in cash, in full, our 2022 Convertible Notes as well as all associated costs and expenses. See “Note 14. Subsequent Events” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
Contingent Milestones
We have obligations to make future payments to third parties that become due and payable upon the achievement of certain development, regulatory and commercial milestones (such as clinical trial achievements, the filing of a BLA, approval by the FDA or product launch). These milestone payments and other similar fees are contingent upon future events and therefore are only recorded when it becomes probable that a milestone will be achieved or other applicable criteria will be met. Because the achievement of these milestones had not reached the threshold for recognition as of December 31, 2021, such contingencies were not recorded in our financial statements.
The following presents a summary of our active partnerships and collaborations that have contingent regulatory and sales milestones:
Counterparty
Description
Potential Aggregate Milestone Amounts
Junshi Biosciences
Toripalimab
$380.0 million (1)
JS006 anti-TIGIT antibody
$255.0 million (2)
Bioeq
CHS-201, a ranibizumab (Lucentis) biosimilar
€12.5 million (3)
Innovent
Biosimilar version of bevacizumab (Avastin)
$37.5 million
(1) The FDA has set a target action date for April 30, 2022 for the toripalimab BLA for the treatment of nasopharyngeal carcinoma. If such regulatory approval is achieved, we will be required to pay Junshi Biosciences a milestone payment of $25.0 million.
(2) Subject to the closing on the exercise of our option, u pon the initiation of a qualifying clinical trial that contains the optioned TIGIT molecule, we will be required to pay Junshi Biosciences a milestone payment of $20.0 million. The amount shown above does not include the expected payment in the first quarter of 2022 of the TIGIT option exercise fee of $35.0 million. See “Note 14. Subsequent Events” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
(3) The FDA has set a target action date of August 2022 for the CHS-201 BLA. If such regulatory approval is achieved, and subject to satisfaction of additional certain manufacturing and supply criteria prior to December 31, 2022, we will be required to pay Bioeq a milestone payment of €2.5 million.
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Other Commitments
Non-cancelable purchase commitments
We enter into contracts in the normal course of business with CROs for preclinical research studies and clinical trials, research supplies and other services and products for operating purposes. We have also entered into agreements with several CMOs for the manufacture and clinical drug supply of our commercial and products candidates. Our total non-cancelable contractual obligations arising from these agreements as of December 31, 2021 was $53.9 million, with $27.1 million of these obligations due within twelve months.
Leases
We lease office and laboratory facilities through arrangements treated as operating leases, and we lease vehicles through finance leases. Our total non-cancelable contractual obligations arising from these agreements as of December 31, 2021 was $12.1 million, with $4.2 million of these obligations due within twelve months.
Contingent payment to InteKrin Stockholders
As part of the InteKrin acquisition in February 2014, we recognized contingent consideration associated with potential payments, which would be payable to the former InteKrin stockholders if we enter into a compound transaction agreement as defined in the InteKrin purchase agreement. In February 2020, we announced that we are seeking strategic alternatives to finance this program externally. As of December 31, 2021, the fair value of the contingent consideration was $0.1 million and was recorded in other liabilities, non-current on our consolidated balance sheets.
Summary Statement of Cash Flows
The following table summarizes our cash flows for the periods presented:
Year Ended December 31,
(in thousands)
2021
2020
Net cash (used in) provided by operating activities
$
(37,432)
$
154,145
Net cash used in investing activities
(138,410)
(14,401)
Net cash provided by financing activities
51,879
223,946
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(123,963)
$
363,690
Net cash (used in) provided by operating activities
Cash used in operating activities of $37.4 million in 2021 was primarily due to the following:
● net loss of $287.1 million;
● an increase in UDENYCA inventory of $6.3 million, which excludes write-offs for inventory that did not meet our acceptance criteria, net of credits received from the manufacturers, of $5.1 million;
● a decrease in accrued rebates, fees and reserve of $2.5 million as a result of lower UDENYCA sales ; and
● a net increase in prepaid manufacturing services and other prepaid, current and non-current assets of $1.5 million.
The cash used in operating activities was partially offset by the following:
● the license fee payment to Junshi Biosciences of $145.0 million pursuant to the Collaboration Agreement, partially offset by a $9.0 million adjustment related to the fair value of the DLOM on our common stock purchased by Junshi Biosciences , which was reclassified to investing activities;
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● non-cash charges related to stock-based compensation of $51.4 million, the net write-off of inventory that did not meet our acceptance criteria of $5.1 million, non-cash interest expense from amortization of debt discount and issuance costs of $4.3 million, depreciation and amortization of property and equipment of $3.5 million, write-off of prepaid manufacturing services of $3.2 million related to the termination of CHS-2020 development, non-cash operating lease expense of $2.2 million, and non-cash accretion of discount on marketable securities of $1.1 million ;
● a decrease in trade receivables of $34.1 million primarily due to the timing of payments from our customers and lower revenue in 2021; and
● an increase in accrued and other current and non-current liabilities of $17.9 million primarily related to contract manufacturing accrued expenses.
Cash provided by operating activities of $154.1 million in 2020 was primarily due to the following:
● net income of $132.2 million;
● an increase in accrued rebates, fees and reserve of $30.4 million as a result of continued growth in UDENYCA sales ;
● upfront and milestone-based license fee payments of $7.5 million to Innovent were reclassified to investing activities to provide better alignment between the cash flows and the underlying nature of the transactions;
● non-cash charges related to stock-based compensation of $38.2 million, non-cash interest expense from amortization of debt discount and issuance costs of $3.5 million, depreciation and amortization of property and equipment of $2.9 million, the net write-off of inventory that did not meet our acceptance criteria of $2.2 million, and non-cash operating lease expense of $2.1 million;
● an increase in accrued compensation of $6.2 million primarily due to increase in headcount and vacation accrual for 2020, partially offset by the settlement of 2019 bonus payout; and
● an increase in accrued and other current and non-current liabilities of $5.0 million primarily related to contract manufacturing accruals and the deferral of certain payroll tax liabilities under the CARES act.
The cash provided by operating activities in 2020 was partially offset by the following:
● an increase in inventory of $38.4 million primarily due to continued growth in UDENYCA sales and to maintain adequate supplies in order to meet future demand for UDENYCA;
● an increase in trade receivables of $15.2 million primarily due to the timing of payment from our customers;
● an increase in prepaid manufacturing services and other prepaid, current and non-current assets of $12.9 million to secure drug production runs scheduled for 2020 and 2021; and
● a decrease in accounts payable of $9.8 million primarily due to the timing of receiving and processing invoices from our vendors.
Net cash used in investing activities
Cash used in investing activities of $138.4 million in 2021 was primarily due to purchases of investments in marketable securities of $182.5 million, upfront license fee of $145.0 million to Junshi Biosciences pursuant to the Collaboration Agreement, partially offset by a $9.0 million adjustment related to the fair value of the DLOM on our common stock purchased by Junshi Biosciences, and purchases of property and equipment of $1.3 million. These uses of cash were partially offset by the proceeds from sales and maturities of investments in marketable securities of $181.4 million.
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Cash used in investing activities of $14.4 million in 2020 was primarily due to purchases of investments in marketable securities of $273.8 million, upfront and milestone-based license fee payments of $7.5 million to Innovent and purchases of property and equipment of $7.2 million, partially offset by the proceeds from maturities of investments in marketable securities of $274.0 million.
Net cash provided by financing activities
Cash provided by financing activities of $51.9 million in 2021 was primarily due to $50.0 million of gross proceeds from issuance of our common stock to Junshi Biosciences partially offset by $9.0 million related to the fair value of the DLOM on the common stock purchased by Junshi Biosciences, $10.4 million proceeds from the exercise of stock options and $3.0 million proceeds from purchases under the ESPP , partially offset by $1.8 million in tax payments related to net share settlement of RSUs.
Cash provided by financing activities of $223.9 million in 2020 was primarily due to $222.2 million in proceeds from the issuance of 2026 Convertible Notes, net of issuance costs, $17.4 million proceeds from the exercise of stock options and $3.8 million proceeds from purchases under the ESPP, partially offset by $18.2 million of capped call option purchases related to the 2026 Convertible Notes.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with United States generally accepted accounting principles (“U.S. GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue generated and expense incurred during the reporting periods. “Note 1. Organization and Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Our estimates are based on our historical experience and on various other factors that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
Product Sales Discounts and Allowances
We recognize revenue when a customer obtains control of the product, which generally occurs upon delivery to and acceptance by the customer. The amount recognized in net revenue reflects the consideration which we expect to receive in exchange for product sold, which includes adjustments to gross sales amounts for estimated chargebacks, rebates, discounts for prompt payment, co-payment assistance, product returns and other allowances. The actual amount of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, the estimates will be adjusted, which will affect net product revenue in the period that such variances become known.
The most significant and judgmental gross to net revenue adjustments are for chargebacks and rebates we provide to customers, hospitals, clinics, and payers under commercial and government programs. Amounts payable are provided for under various programs and vary by payer and individual payer plans. In developing our estimates of chargebacks and rebates, we use our historical claims experience and also consider payer mix, statutory discount rates and expected utilization, contractual terms, market events and trends, customer and commercially available payer data, as well as data collected from the healthcare providers, channel inventory data obtained from our customers and other relevant information.
In 2021, 2020 and 2019, total sales deductions to gross product sales were 67%, 59% and 49%, respectively. Adjustments to provisions for rebates and chargebacks related to sales made in prior periods were less than 3% of the actual payments and customer credits issued in each of the years 2021 and 2020. A change of 10.0% in our total provisions for product sales discounts and allowances as of December 31, 2021, would have resulted in a change of our pre-tax earnings in 2021 by approximately $11.0 million. A summary of the activities and ending reserve balances for each significant category of discounts and allowances, can be found in “Note 2. Revenue” in the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Form 10-K.
Inventory
Our inventory is stated at the lower of cost or estimated net realizable value with cost determined under the first-in first-out method. The determination of excess or obsolete inventory requires judgment including consideration of many factors, such as estimates
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of future product demand, current and future market conditions, product expiration information and potential product obsolescence, among others.
Although we believe that the assumptions we use in estimating potential inventory write-downs are reasonable, if actual market conditions are less favorable than projected by us, write-downs of inventory, charges related to firm purchase commitments, or both may be required which would be recorded as cost of goods sold in our consolidated statement of operations. Adverse developments affecting our assumptions of the level and timing of demand for our products include those that are outside of our control such as the actions taken by competitors and customers, the direct or indirect effects of the COVID-19 pandemic, and other factors.
In 2021, 2020 and 2019, cost of goods sold included write-offs for inventory of $5.1 million, $2.2 million and $0.4 million, respectively, that did not meet the Company’s acceptance criteria, net of credits received from manufacturers. In 2019, cost of goods sold included write-off of prepaid manufacturing costs of $1.3 million due to the cancellation of certain manufacturing reservations. There were no write-offs for excess and obsolete inventory during these periods. As of December 31, 2021, a 10.0% reduction in the carrying value of inventory we expect to sell in 2022 would be approximately $3.8 million.
Recent Accounting Pronouncements
For a description of the impact of recent accounting pronouncements, see “Note 1. Organization and Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
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