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Item 7. Management’s Discussion and Analysis

2023-03-06 compared with 2022-02-23 · 251 added, 246 removed, 181 unchanged (73% of the section changed)

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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

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.

For a detailed discussion 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.

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Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 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, 2021, filed with the SEC on February 23, 2022.

We are a commercial-stage biopharmaceutical company focused on the research, development and commercialization of innovative immunotherapies to treat cancer.

We are a commercial-stage biopharmaceutical company focused on the research, development and commercialization of innovative cancer treatments and the commercialization of our portfolio of FDA-approved biosimilars.

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

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.

Our commercial portfolio includes three FDA-approved biosimilar products.

Our first product, UDENYCA, a biosimilar to Neulasta, a long-acting G-CSF, was launched commercially in the United States in January 2019.

Our second product, CIMERLI, was approved by the FDA in August 2022 as a biosimilar product interchangeable with Lucentis for the treatment of neovascular (wet) age-related macular degeneration, macular edema following retinal vein occlusion, diabetic macular edema, diabetic retinopathy, and myopic choroidal neovascularization.

The FDA also granted CIMERLI 12 months of first interchangeable exclusivity .

We launched CIMERLI commercially in the United States on October 3, 2022.

In December 2021, the FDA-approved YUSIMRY, which we plan to launch in the United States on or after July 1, 2023, pursuant to the terms of an agreement with Humira’s manufacturer, AbbVie.

In addition to our three FDA-approved biosimilar products, we also have an original BLA under review by the FDA for toripalimab.

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 have the potential to promote the immune system’s ability to attack and kill tumor cells.

The original BLA for toripalimab was 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 .

On April 29, 2022, we received a CRL from the FDA for the original BLA for toripalimab requesting certain manufacturing process changes that we and Junshi Biosciences believe are readily addressable.

On July 6, 2022, we announced that the FDA accepted the resubmission of the original BLA for toripalimab and announced that the FDA set a PDUFA action date for December 23, 2022.

On December 24, 2022, we announced that we did not receive an action letter from the FDA by the PDUFA action date.

The FDA previously communicated that an on-site inspection of Junshi Biosciences’ manufacturing facility for toripalimab is required before the FDA can approve the original BLA;

however, they were unable to conduct the inspection by December 23, 2022 due to the impact of COVID-19 related restrictions on travel in China.

The BLA for toripalimab remains under review, and we and Junshi Biosciences are engaged in ongoing discussions with the FDA about the pre-approval inspection plans.

Since the decision in February 2022 by the FDA to not approve the BLA for sintilimab, the FDA’s current stance is to reject most product candidates that do not have data that is reflective of U.S.

medical practice and/or the U.S.

patient population and in particular with clinical trials conducted in a single country such as China.

However, we believe that our original BLA for toripalimab for NPC is a distinct case because there are no approved immunotherapies for NPC in the United States and the FDA has stated that NPC warrants regulatory flexibility with respect to the sufficiency of single country clinical data.

We plan to launch toripalimab in the United States in the third quarter of 2023, if approved by July 1, 2023.

In January 2023, we and Junshi Biosciences acted to reduce the scope of the ongoing development plan for toripalimab in the United States that is used as part of the calculation for reimbursable research and development expense under the Collaboration Agreement.

In May 2022, we discontinued development of 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, which have supported the successful commercialization of UDENYCA and CIMERLI.

We expect to leverage these capabilities as we build and launch our immuno-oncology franchise, continue to grow our ophthalmology product portfolio and launch the commercialization of other biosimilar products.

We primarily operate in the United States and partner with companies that operate in other countries.

We have no material direct exposure to Russia and Ukraine;

however, we are monitoring any broader economic impact from Russia’s invasion of Ukraine and the ongoing war between the two nations, including heightened risk of cyberattacks, increased prices of fuel and other commodities, and potential impacts to our partners’ supply chains.

Business Update

On January 9, 2023, we announced that we entered into the Term Sheet with Klinge Biopharma for the exclusive commercialization rights to FYB203, a biosimilar candidate to Eylea® (aflibercept), in the United States.

The parties to the Term Sheet expect to execute the Definitive Agreements contemplated by the Term Sheet and complete the transaction in the first half of 2023.

Under the Term Sheet, we will make a total upfront payment of approximately €30 million, comprised of cash and our common stock, thirty days after the execution of the Definitive Agreements.

We also agreed to make other regulatory and launch milestone payments and to make royalty payments based on approximately equal sharing of profits from the sale of FYB203 in consideration for the commercialization rights to FYB203 in the United States.

The material terms of the transaction with Klinge Biopharma will be set forth in the Definitive Agreements, which we will include in a subsequent filing when such Definitive Agreements are executed.

On November 8, 2022, we filed a registration statement on Form S-3, which was declared effective on November 17, 2022 (the “Registration Statement”).

Under the Registration Statement, we may offer and sell up to $150.0 million in the aggregate of our common stock, preferred stock, debt securities, warrants and units from time to time in one or more offerings.

Also on November 8, 2022, we entered into a sales agreement (“Sales Agreement”) with Cowen and Company, LLC (“Cowen”) pursuant to which we may issue and sell from time to time up to $150.0 million of our common stock through or to Cowen as our sales agent or principal in an at-the-market offering (“ATM Offering”).

Any shares of our common stock offered and sold in the ATM Offering are to be issued pursuant to the Registration Statement and the 424(b) prospectus supplement relating to the ATM Offering dated November 17, 2022.

As of December 31, 2022, we sold 916,884 shares of common stock at a weighted-average price per share of $7.30 for gross proceeds of $6.7 million pursuant to the ATM Offering and received net proceeds of $6.5 million, net of $0.2 million of commissions and fees.

In January 2023, we settled an additional 295,200 shares at a weighted-average price per share of $7.41 for gross proceeds of $2.2 million pursuant to the ATM Offering and received net proceeds of $2.1 million, net of $0.1 million of commissions and fees.

In January 2022, we entered into the Loan Agreement with the Collateral Agent and the Lenders 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”) that was not funded;

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”) that was funded on September 14, 2022.

We have 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 our 2026 Convertible Notes is greater than $50.0 million on October 1, 2025.

The outstanding tranches of the 2027 Term Loans accrue interest from inception through March 31, 2023 at 8.25% plus three-month LIBOR per annum with a LIBOR floor of 1.0%;

and, starting April 1, 2023, accrue interest at 8.25% plus the sum (the “Adjusted Term SOFR”) of three-month SOFR and 0.26161% per annum, with a floor on Adjusted Term SOFR of 1.0%.

The interest rate for the fourth quarter of 2022 was 12.00%.

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.

Products and Product Candidates

Our portfolio includes the following products and product candidates:

● UDENYCA is a biosimilar to Neulasta, a long-acting G-CSF.

We launched UDENYCA commercially in the United States in January 2019.

In 2022, 2021 and 2020, we recorded UDENYCA net product sales of $203.8 million, $326.5 million and $475.8 million, respectively.

In addition to the currently marketed PFS presentation and UDENYCA AI, which had its prior approval supplement approved on March 3, 2023, we are also developing additional presentations of UDENYCA, such as a proprietary OBI and an AI .

In October 2021, we announced positive results from a randomized, open-label, crossover study assessing the PK and pharmacodynamic bioequivalence of UDENYCA administered via OBI compared to our currently marketed UDENYCA PFS.

We are planning a 2023 launch of UDENYCA OBI, if approved by the FDA.

We submitted a prior approval supplement to

the FDA for UDENYCA AI in 2022.

The FDA approved the prior approval supplement for UDENYCA AI on March 3, 2023.

Commercial availability of UDENYCA AI is planned for the second quarter of 2023.

● 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.

More than thirty company-sponsored toripalimab clinical studies covering more than fifteen indications have been conducted 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 original BLA for toripalimab 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.

The FDA issued a CRL for the original BLA for toripalimab requesting certain manufacturing process changes.

On July 6, 2022, we announced that the FDA accepted the resubmission of the original BLA for toripalimab and announced that the FDA set a PDUFA action date for December 23, 2022.

On December 24, 2022, we announced that we did not receive an action letter from the FDA by the PDUFA action date.

The FDA previously communicated that an on-site inspection of Junshi Biosciences’ manufacturing facility for toripalimab is required before the FDA can approve the original BLA;

however, they were unable to conduct the inspection by December 23, 2022 due to the impact of COVID-19 related restrictions on travel in China.

The BLA for toripalimab remains under review, and we and Junshi Biosciences are engaged in ongoing discussions with the FDA about the pre-approval inspection plans.

We plan to launch toripalimab in the United States in the third quarter of 2023, if approved by July 1, 2023.

We believe there is potentially a high unmet need in NPC based on the current FDA-approved treatment alternatives and the lack of any approved immunotherapies.

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.

● CHS-006 is an investigational recombinant humanized IgG4κ monoclonal antibody designed to act specifically against human TIGIT that we are developing in collaboration with Junshi Biosciences.

A number of third-party 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 in some tumor types.

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

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.

● YUSIMRY (adalimumab-aqvh), is a biosimilar of Humira, a monoclonal antibody that can bind to TNF.

A dose escalation, dose expansion clinical trial (clinicaltrials.gov identifier# NCT05061628) evaluating the safety, tolerability and pharmacokinetic properties of CHS-006 as monotherapy and in combination with PD-1 inhibitor toripalimab in patients with advanced solid tumors is ongoing in China.

The FDA has allowed clinical trials for CHS-006 to proceed in the United States under an IND, and we plan to advance toripalimab in combination with CHS-006 in a clinical trial in North America in the second quarter of 2023.

● We are pursuing an early-stage development candidate designed to improve anti-PD-1 clinical benefit by transforming an unfavorable TME to a more favorable TME.

We expect to submit an IND to the FDA in 2023 for CHS-1000, an antibody targeting ILT4.

● YUSIMRY, a biosimilar of Humira (adalimumab), 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.

In December 2021, the FDA approved YUSIMRY, which we plan to launch in the United States on or after July 1, 2023, pursuant to the terms of an agreement with Humira’s manufacturer, AbbVie Inc.

Based on our current review, we believe the adalimumab market will be very competitive when we are able to launch on July 1, 2023.

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.

● CIMERLI is a Lucentis biosimilar .

In November 2019, we entered into a license agreement with Bioeq for the commercialization of CIMERLI in certain dosage forms in both a vial and PFS presentation.

Under the Bioeq Agreement, Bioeq granted to us an exclusive royalty-bearing license to commercialize CIMERLI in the field of ophthalmology (and any other approved labelled indication) in the United States.

On August 2, 2022, the FDA approved CIMERLI as a biosimilar product interchangeable with Lucentis for the treatment of neovascular (wet) age-related macular degeneration, macular edema following retinal vein occlusion, diabetic macular edema, diabetic retinopathy, and myopic choroidal neovascularization.

The FDA also granted CIMERLI 12 months of first interchangeable exclusivity .

On October 3, 2022, we launched CIMERLI commercially in the United States in both 0.3 mg and 0.5 mg dosage forms.

Discontinued Product Candidates

On May 3, 2022, we provided notice of termination of the Innovent Agreement to Innovent to discontinue development of CHS-305, a bevacizumab (Avastin) biosimilar candidate, because regulatory approval of the licensed product could not be reasonably obtained within the agreed time period .

In October 2022, we discontinued development of our preclinical immuno-oncology program, CHS-3318, an antibody targeting CCR8.

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.

On February 1, 2021, we entered into 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, we 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.

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.

In March 2022, we paid $35.0 million for the exercise of our option to license CHS-006.

We and Junshi Biosciences are jointly developing CHS-006 with each party 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, for each exercised option, we will be obligated to pay Junshi Biosciences an 18% royalty on net sales, up to $85.0 million for the achievement of certain regulatory approvals, and 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, 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, 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

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.

The $35.0 million payment for the option to license CHS-006 was reflected in our first quarter of 2022 financial statements.

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.

2 unchanged sentences

As of December 31, 2022, 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.

The additional milestone payments, option fee for the IL-2 cytokine and royalties are contingent upon future events and, therefore, will be recorded if and when it becomes probable that a milestone will be achieved, or when an option fee or royalties are incurred.

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 $20.06, for an aggregate amount of approximately $50.0 million in cash.

COVID-19 Update

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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.

Although cases and deaths from the COVID-19 pandemic have generally declined in the United States in the past year, outbreaks of COVID-19 in China recently resulted in a protracted lockdown covering all of Shanghai where our partner Junshi Biosciences has its headquarters.

The lingering impacts of recent outbreaks of COVID-19 in China may impact the timeline to manufacture toripalimab and the FDA has communicated to us the COVID-19 pandemic will impact the FDA’s ability to conduct foreign inspections of our partner’s manufacturing facilities in China.

Until further outbreaks of COVID-19 are controlled, we expect it may continue to adversely impact our sales growth.

In addition, the spread of more contagious and/or deadly variants could cause future outbreaks of COVID-19 and could result in the reinstatement of restrictive orders that could disrupt our business.

While the long-term economic impact and future outbreaks of COVID-19 may be difficult to predict, the pandemic has resulted in, and future outbreaks may continue to cause, 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 world’s ongoing recovery from the COVID-19 pandemic could materially affect our business and the value of our notes and our common stock.

Financial Operations Overview

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.

In December 2021, the FDA-approved YUSIMRY, which we plan to launch in the United States on or after July 1, 2023, pursuant to the terms of an agreement with Humira’s manufacturer, AbbVie.

On August 2, 2022, the FDA approved CIMERLI, which we launched on October 3, 2022.

Total net revenues were $211.0 million and $326.6 million in 2022 and 2021, 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

of UDENYCA and therefore is not reflected in cost of goods sold.

During the third quarter of 2022, we recorded an inventory write-down of $26.0 million for inventory at risk of expiration, and in the year ended December 31, 2021 we recorded a net $5.1 million inventory write-off for inventory that did not meet acceptance criteria.

Through March 31, 2021, a portion of the costs of producing UDENYCA sold was expensed as research and development before the FDA approval 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;

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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.

Additionally, w e 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, and pursuant to the Genentech Agreement we incur a royalty that is a low single-digit percentage of net sales of CIMERLI that must be paid through the end of 2023.

Research and Development Expense

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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;

● expense incurred under agreements with collaborators, 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;

● upfront and milestone payments related to licensing and collaboration agreements.

● costs associated with manufacturing process development activities, analytical activities and pre-launch inventory manufactured prior to regulatory approval being obtained or deemed to be probable ;

● upfront and certain 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.

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● 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 largest component of our total operating expense has historically been our investment in research and development activities, including the licensing and collaboration costs, clinical development and manufacturing process development of our product candidates.

The process of conducting the necessary clinical research to obtain regulatory approval is costly and time consuming.

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External costs incurred by product candidate:

Discontinued (3)

Discontinued (4)

Bevacizumab (Avastin) biosimilar product candidate licensed from Innovent

Pivotal Clinical Trials (3)

Pivotal Clinical Trials (6)

Junshi Biosciences upfront payment and right of first negotiation fee

Innovent upfront and milestone based license fee payments

Clinical Trials (4)

Early-Stage Development (5)

Discontinued projects

Discontinued (6)

Junshi Biosciences upfront and option exercise payments

Other research and development expenses (7)

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Total research and development expenses

(1) Costs related primarily to the development of additional presentations of UDENYCA.

(1) Expenses related primarily to development efforts to obtain Prior Approval Supplements (“PAS”) for 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.

Expenses in 2021 primarily related to FDA pre-approval inspections and scaling up process performance qualification production runs.

Expenses in 2022 primarily related to on-going manufacturing efforts for new formulations and clinical studies.

(3) The FDA has granted Priority Review for the toripalimab BLA, as well as Breakthrough Therapy Designation for toripalimab for the treatment of NPC, and the original BLA for toripalimab is currently under review.

In 2022 and 2021, we reimbursed Junshi Biosciences $25.0 million per year for

toripalimab clinical trials that were included in the development plan for toripalimab as described in the Collaboration Agreement and with changes approved by the joint development committee.

(4) In March 2022, we exercised our option to license CHS-006, a TIGIT-targeted antibody, in the United States and Canada from Junshi Biosciences, expanding our 2021 immuno-oncology collaboration agreement.

Expenses in 2022 included our reimbursement for certain costs related to an ongoing CHS-006 clinical trial being conducted by Junshi Biosciences.

(5) We expect to submit an IND to the FDA in 2023 for CHS-1000, an antibody targeting ILT4.

(6) The $1.0 million of expense in 2022 relates to CHS-3318 and CHS-305 which were both discontinued during the year.

The expense in 2021 includes $11.2 million related to CHS-2020 which was discontinued during 2021 and $9.1 million related to CHS-305.

(7) Amount consists of expenses for other pipeline candidates and CIMERLI, which was approved by the FDA in August 2022.

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.

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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.

Loss on Debt Extinguishment

Loss on debt extinguishment consists of losses incurred related to the early repayment of debt obligations .

Other Income (Expense), Net

Other income (expense), net consists primarily of interest earned on our cash, cash equivalents and investments in marketable securities, foreign exchange gains (losses) resulting from currency fluctuations, and gains (losses) from disposal of long-lived assets.

Results of Operations

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(in thousands)

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.

The decrease in net revenue was primarily due to a decrease in the number of UDENYCA units sold and a reduction in the average net selling price per unit resulting from competition and lower patient enrollment.

Our net revenue and market penetration may continue to be adversely impacted by pricing trends and competitive dynamics in the overall pegfilgrastim market.

In addition, the COVID-19 pandemic has negatively impacted the pre-filled syringe pegfilgrastim market due to preferences to administer medication at home.

These negative factors were partially offset by our CIMERLI launch in October 2022 which contributed $6.9 million of net revenue in 2022.

We expect our net revenue to increase during 2023, as a result of CIMERLI’s launch in October 2022 and the planned launches in 2023 of toripalimab and YUSIMRY and additional presentations of UDENYCA.

Cost of Goods Sold

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Cost of goods sold

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.

The increase in cost of goods sold primarily resulted from t he $26.0 million write-down in the third quarter of 2022 of inventory at risk of expiration compared to the $5.1 million net write-off of inventory in 2021 for inventory that did not meet acceptance criteria, partially offset by decreases in the number of UDENYCA units sold, lower royalty costs by $3.0 million as well as the sale of $3.3 million of previously expensed UDENYCA batches that were required to be expensed as research and development prior to the FDA approval of UDENYCA and, therefore, was not reflected in the cost of goods sold in 2021.

We expect our gross margin to decrease during 2023 primarily driven by royalties paid for CIMERLI sales, sales of YUSIMRY in a very competitive market and continued declines in net realized prices of UDENYCA.

This decrease is expected to be partially offset by the $26.0 million write-down of UDENYCA inventory at risk of expiration in 2022.

Research and Development Expense

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Research and development

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

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;

The decrease 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 in February 2021, which was partially offset by a $9.0 million credit related to the fair value of the discount for lack of marketability on the common shares purchased under the Stock Purchase Agreement, as compared to 2022 which included an upfront payment of $35.0 million to exercise our option to license CHS-006, a TIGIT-targeted antibody, in the United States and Canada ;

● a decrease of $22.0 million related to the development of YUSIMRY mainly due to higher costs in 2021 associated with FDA pre-approval inspections and scaling up process performance qualification production runs;

● a decrease of $21.7 million related to the development of additional presentations of UDENYCA;

● a decrease of $11.2 million in CHS-2020 costs related to the discontinuation of its development in the first quarter of 2021;

● a decrease of $8.5 million in costs for the development of bevacizumab (Avastin) biosimilar, a former product candidate which we discontinued development in May 2022;

● a decrease of $1.8 million in co-development costs for toripalimab and CHS-006.

The decrease was partially offset by:

● an increase of $2.7 million for early stage development of an antibody targeting ILT4;

● an increase of $1.8 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;

● 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.

We expect our research and development expense in 2023 to be lower than in 2022, excluding potential milestone payments related to our product candidates, because of the reduced scope of the development plan for toripalimab in the United States based on changes approved by us and Junshi Biosciences.

Selling, General and Administrative Expense

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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 ;

● 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.

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.

● a net increase of $22.1 million for personnel, consulting, professional services, marketing, advertising and other expenses resulting from an increase in sales force personnel and related commercial functions to support our current and future product sales;

● an increase of $4.1 million in facilities, supplies and materials and other infrastructure related expenses to support our commercial infrastructure for our current and future products ;

● an increase of $3.2 million in travel expenses as a result of curtailed travel in 2021 due to COVID-19.

We expect our selling, general and administrative expense in 2023 to be lower than in 2022 primarily as a result of decreased commercial costs.

Interest Expense

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Interest expense

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

The increase in interest expense in 2022 was primarily due to a higher average outstanding debt balance and interest rate increases in the United States in 2022, which has led to a higher weighted-average interest rate in 2022 as compared to 2021.

In addition, the increase in interest expense was due to $3.9 million of interest expense related to the 2027 Term Loan discount and debt issuance costs that were allocated to unfunded tranches and subsequently amortized over the respective commitment periods for tranches, including $2.3 million allocated to Tranche B that was fully amortized in the first quarter of 2022.

Our 2027 Term Loans have a variable interest rate component that resets the first day of every quarter, and the total interest rate ranged from 9.25% in the first quarter of 2022 to 12.00% in the fourth quarter of 2022.

The interest rate on the 2027 Term Loans increased to 13.03% for the first quarter of 2023.

As a result of the higher interest rate and higher average outstanding debt balance, we expect higher interest expense in 2023.

Loss on Debt Extinguishment

Year Ended December 31,

(in thousands)

Income tax provision

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.

Loss on debt extinguishment

The $6.2 million loss on debt extinguishment recorded in 2022 resulted from voluntarily prepaying all amounts outstanding under the loan agreement between us and affiliates of Healthcare Royalty Partners dated as of January 7, 2019 (the “2025 Term Loan”) in January 2022.

Other Income (Expense), Net

Year Ended December 31,

(in thousands)

Other income (expense), net

In 2022 other income (expense), net increased primarily as a result of interest income on our cash, cash equivalents and marketable securities.

The interest rate in 2022 was higher than in 2021 due to several interest rate increases in the United States in 2022.

The net expense in 2021 was due to the realized loss upon liquidating our investments in marketable securities.

Liquidity and Capital Resources

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Debt obligations:

2027 Term Loans

2025 Term Loan

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Total debt obligations

(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.

(1) The 2027 Term Loans were entered into in January 2022 in connection with the payoff and refinancing of existing debt facilities.

See below for further discussion and “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.

Although we were profitable in 2020 and 2019, due to our research and development expenditures and decline in revenue beginning in 2021, we have generated significant operating losses in all other years since our inception, including in 2022 and 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.

We entered into the Sales Agreement related to the ATM Offering pursuant to which we may issue and sell from time to time up to $150.0 million of our common stock.

The ability to elect to sell shares of our common stock in the ATM Offering from time to time adds to our financial flexibility.

As of December 31, 2022, we had an accumulated deficit of $1.3 billion and cash, cash equivalents, and marketable securities of $191.7 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;

● 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;

● 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 believe that our available cash, cash equivalents, marketable securities, cash collected from product sales and ATM Offering proceeds will be sufficient to fund our planned expenditures and meet our obligations for at least the twelve months following our financial statement issuance date.

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.

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● the extent to which we acquire or invest in businesses, products or technologies;

● the costs of the impact from the COVID-19 pandemic.

● the impact of general economic conditions on our business, including but not limited to increased interest rates and high inflation;

● the costs of the impact from the COVID-19 pandemic and future outbreaks.

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.”

Financing arrangements

2027 Term Loans

In January 2022, we entered into the 2027 Term Loans which provide 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 that was funded on January 5, 2022;

(ii) a Tranche B Loan in an aggregate principal amount of $100.0 million that was funded on March 31, 2022, in connection with the full repayment of our 2022 Convertible Notes due in March 2022;

(iii) a Tranche C Loan in an aggregate principal amount of $50.0 million that was not funded;

and (iv) a Tranche D Loan in an aggregate principal amount of $50.0 million that was funded on September 14, 2022.

We have 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) 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 accrue interest from inception through March 31, 2023 at 8.25% plus three-month LIBOR per annum with a LIBOR floor of 1.0%;

and, starting April 1, 2023, accrue interest at 8.25% plus the Adjusted Term SOFR, with a floor on Adjusted Term SOFR of 1.0%.

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 March 31, 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 all four tranches.

Pursuant to the Loan 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 voluntarily repay in full all amounts outstanding under the 2025 Term Loan, as well as all associated costs and expenses;

and proceeds of the Tranche B Loan were drawn in connection with the full repayment of our 2022 Convertible Notes due in March 2022.

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.

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.

As of December 31, 2021, the carrying amount of our $75.0 million aggregate principal 2025 Term Loan was $75.5 million.

In January 2022, we 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 the $81.9 million payoff amount which included all costs and fees.

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.

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.

As of December 31, 2021, the carrying amount of our $100.0 million aggregate principal amount convertible senior notes due March 31, 2022 was $108.5 million, inclusive of a 9% premium due at maturity or redemption, if not earlier converted.

During the first quarter of 2022, we fully repaid these notes, and in connection with the repayment, drew $100.0 million from the Tranche B Loan of the

2027 Term Loans.

Excluding accrued interest, the payoff amount of the 2022 Convertible Notes was $109.0 million.

2026 Convertible Notes

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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.

Since inception, the conversion price has been 51.9224 shares of common stock per $1,000 principal amount of the 2026 Convertible Notes, which represents a 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 $14.82 per share of our 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.

The 2026 Convertible Notes are not redeemable at our election before maturity.

If the 2026 Convertible Notes were converted on December 31, 2022, the holders of the 2026 Convertible Notes would have received common shares with an aggregate value of $94.6 million based on our closing stock price of $7.92 as of December 30, 2022.

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.

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

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.

Since inception, the cap price has been $25.93 per share, which represents a premium of approximately 75.0% over the last reported sale price of our common stock of $14.82 per share on April 14, 2020, and is subject to certain adjustments under the terms of the capped call transactions.

Contingent Milestones

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Because the achievement of these milestones had not reached the threshold for recognition as of December 31, 2022, 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:

Potential Aggregate Milestone Amounts

The following table presents a summary of our active partnerships and collaborations that have contingent regulatory and sales milestones as of December 31, 2022:

Potential Aggregate Milestone Amount (1)

Junshi Biosciences

$380.0 million (2)

JS006 anti-TIGIT antibody

$255.0 million (2)

CHS-201, a ranibizumab (Lucentis) biosimilar

CHS-006 anti-TIGIT antibody

$255.0 million (3)

Biosimilar version of bevacizumab (Avastin)

€5.0 million (4)

(1) The FDA has set a target action date for April 30, 2022 for the toripalimab BLA for the treatment of nasopharyngeal carcinoma.

(1) Excludes the potential aggregate upfront and milestone amounts for the Term Sheet with Klinge Biopharma for the exclusive commercialization rights to FYB203.

The parties to the Term Sheet expect to execute the Definitive Agreements contemplated by the Term Sheet and complete the transaction in the first half of 2023.

(2) The FDA issued a CRL for the original BLA we had submitted for toripalimab requesting a quality process change that we and Junshi Biosciences believe is readily addressable.

On July 6, 2022, we announced that the FDA accepted the resubmission of the original BLA for toripalimab and that the FDA set a PDUFA action date for December 23, 2022.

On December 24, 2022, we announced that we did not receive an action letter from the FDA by the PDUFA action date.

The BLA for toripalimab remains under review, and we and Junshi Biosciences are engaged in ongoing discussions with the FDA about the pre-approval inspection plans.

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.

(3) Upon initiation of the first qualifying clinical trial that contains the optioned TIGIT molecule, we will be required to pay Junshi Biosciences a milestone payment of $20.0 million.

(4) Relates to a milestone contingent upon the launch readiness of a PFS product, if achieved during 2023.

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.

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 product candidates.

Our non-cancelable purchase commitments as of December 31, 2022 were $68.8 million, as outlined in “Note 8.

Commitments and Contingencies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.

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, 2022 was $10.3 million, with $4.9 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

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(in thousands)

Net cash (used in) provided by operating activities

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net (decrease) increase in cash, cash equivalents and restricted cash

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 ;

● 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;

● 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;

● 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;

● 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;

● a decrease in accounts payable of $9.8 million primarily due to the timing of receiving and processing invoices from our vendors.

Net decrease in cash, cash equivalents and restricted cash

Net cash used in operating activities

Cash used in operating activities of $241.1 million in 2022 was primarily due to the net loss of $291.8 million adjusted for the classification of the cash option payment to Junshi Biosciences of $35.0 million to investing activities, non-cash items including stock-based compensation expense of $50.7 million, net inventory write-offs of $26.0 million and other non-cash adjustments of $18.2 million, partially offset by the changes in our operating assets and liabilities of $79.3 million.

Cash used in operating activities of $37.4 million in 2021 was primarily due to the net loss of $287.1 million adjusted for the classification of the upfront license fee payment to Junshi Biosciences of $136.0 million pursuant to the Collaboration Agreement, non-cash items including stock-based compensation expense of $51.4 million, net inventory write-offs of $5.1 million and other non-cash adjustments of $14.8 million, as well as the changes in our operating assets and liabilities of $42.4 million.

Net cash used in investing activities

Cash used in investing activities of $166.9 million in 2022 was primarily due to purchases of investments in marketable securities of $127.4 million, the option fee payment of $35.0 million to license CHS-006 from Junshi Biosciences, a $2.4 million milestone payment to Bioeq related to the launch of CIMERLI, and purchases of property and equipment of $2.0 million.

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.

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.

Cash provided by financing activities of $54.3 million in 2022 was primarily due to proceeds of $240.7 million under the 2027 Term Loans, net of debt discount and issuance costs, proceeds of $6.4 million from the ATM Offering, net of issuance costs, and $2.3 million proceeds from purchase under the ESPP.

These were partially offset by fully repaying $109.0 million on the 2022 Convertible Notes and $81.8 million on the 2025 Term Loan (excluding interest which is presented as an operating activity), and $3.7 million in tax payments related to net share settlement of RSUs.

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.

Critical Accounting Estimates

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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

of future product demand, current and future market conditions, product expiration information and potential product obsolescence, among others.

The determination of excess or obsolete inventory requires judgment including consideration of many factors, such as estimates 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.

In 2022, 2021 and 2020, cost of goods sold included inventory write-offs, net of $26.0 million, $5.1 million and $2.2 million, respectively.

As of December 31, 2022, a 10% reduction in the carrying value of inventory we expect to sell in 2023 would be approximately $3.9 million.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis