Notes to Condensed Consolidated Financial Statements

(unaudited)

Description of the Business

Coherus BioSciences, Inc. (the “Company”, “Coherus”, “we”, “our” or “us”) is a late-stage clinical biologics platform company, focused on the global biosimilar market. The Company’s headquarters and laboratories are located in Redwood City, California and in Camarillo, California, respectively. The Company operates in one segment.

The Company’s clinical stage pipeline consists of a long-acting form of granulocyte colony-stimulating factor (“G-CSF”), and two anti-inflammatory agents targeting tumor necrosis factor (“TNF”):

Need to Raise Additional Capital

As of June 30, 2016, the Company had an accumulated deficit of $545.3 million and cash and cash equivalents of $220.9 million. In February 2016, the Company issued and sold $100.0 million aggregate principal amount of 8.2% senior convertible notes due March 31, 2022 (see Note 6). In May and June 2016, the Company issued and sold 4,025,000 shares of its common stock at $18.00 per share for net proceeds of $69.0 million (see Note 8). The Company believes that its current available cash and cash equivalents, together with funding it expects to receive under its license agreements with Daiichi Sankyo and Baxalta, and additional projected license agreements, will be sufficient to fund its planned expenditures and meet the obligations through at least the next 12 months . The Company will need to raise additional funds in the future, however there can be no assurance that such efforts will be successful or that, in the event that they are successful, the terms and conditions of such financing will be favorable. If the Company is unable to obtain adequate financing when needed, it may have to delay, reduce the scope of or suspend one or more of its clinical trials, research and development programs or commercialization efforts.   

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Unaudited Condensed Consolidated Financial Statements

The accompanying condensed consolidated financial statements include the accounts of Coherus and its wholly owned subsidiaries as of June 30, 2016: Coherus Intermediate Corp, Coherus Oncology, Inc., InteKrin Therapeutics Inc. (“InteKrin”), and InteKrin’s 82.5% majority owned subsidiary of InteKrin Russia. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities Act of 1933, as amended (Securities Act). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring accruals that the Company believes are necessary to fairly state the financial position and the results of the Company’s operations and cash flows for interim periods in accordance with U.S. GAAP. Interim-period results are not necessarily indicative of results of operations or cash flows for a full year or any subsequent interim period.

The accompanying condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on February 29, 2016.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements. Management uses significant judgment when making estimates related to its stock-based compensation, valuation of deferred tax assets, impairment of goodwill and long-lived assets, the valuation of acquired intangible assets, clinical trial accruals, revenue recognition period, contingent consideration, as well as certain accrued liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

Foreign Currency

The functional currency of InteKrin Russia, which the Company acquired in February 2014, is the Russian Ruble. Accordingly, the financial statements of this subsidiary are translated into U.S. dollars using appropriate exchange rates. Unrealized gains or losses on translation are recognized in accumulated other comprehensive loss in the condensed consolidated balance sheet.

The foreign exchange gains and losses recorded in other expense, net in the condensed consolidated statements of operations for the three months ended June 30, 2016 and 2015, were net losses of $92,000 and $129,000, respectively, and for the six months ended June 30, 2016 and 2015 were net losses of $356,000 and $38,000, respectively.

Segment Reporting and Customer Concentration

The Company operates and manages its business as one reportable and operating segment, which is the business of developing and commercializing biosimilar products, and, as part of the InteKrin acquisition, small molecules. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. Long-lived assets are primarily maintained in the United States of America.

The following table summarizes revenue by geographic region (in thousands):

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Customers whose collaboration and license revenue accounted for 10% or more of total revenues were as follows:

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists; transfer of technology has been completed, services have been performed or products have been delivered; the fee is fixed and determinable; and collection is reasonably assured.

For revenue agreements with multiple elements, the Company identifies the deliverables included within the agreement and evaluates which deliverables may represent separate units of accounting based on the achievement of certain criteria, including whether the delivered element has stand-alone value to the collaborator. Deliverables under the arrangement are a separate unit of accounting if (i) the delivered item has value to the customer on a standalone basis and (ii) if the arrangement includes a general right of return relative to the delivered item and delivery or performance of the undelivered items are considered probable and substantially within the Company’s control.

The Company determines how to allocate arrangement consideration to identified units of accounting based on the selling price hierarchy provided under the relevant guidance. The selling price used for each unit of accounting is based on vendor-specific objective evidence, if available, third party evidence if vendor-specific objective evidence is not available or estimated selling price if neither vendor-specific nor third-party evidence is available. Management may be required to exercise considerable judgment in determining whether a deliverable is a separate unit of accounting and in estimating the selling prices of identified units of accounting under its agreements.

Upfront payments received in connection with licenses of the Company’s technology rights are deferred if facts and circumstances dictate that the license does not have stand-alone value. Such payments are recognized as license revenue over the estimated period of performance that is generally consistent with the terms of the research and development obligations contained in the specific collaboration and license agreement. The Company regularly reviews the estimated period of performance based on the progress made under each arrangement. Amounts received as funding of research and development activities are recognized as revenue if the collaboration arrangement involves the sale of the Company’s research or development services. However, such funding is recognized as a reduction in research and development expense when the Company engages in a research and development project jointly with another entity, with both entities participating in project activities and sharing costs and potential benefits of the arrangement.

Payments that are contingent upon the achievement of a substantive milestone are recognized in their entirety in the period in which the milestone is achieved, assuming all other revenue recognition criteria are met. A milestone is defined as an event that can only be achieved based on the Company’s performance where there is substantive uncertainty about whether the event will be achieved at the inception of the arrangement. Events that are contingent only on the passage of time or only on counterparty performance are not considered milestones under accounting guidance. The Company’s evaluation includes an assessment of whether (a) the consideration is commensurate with either (1) the Company’s performance to achieve the milestone, or (2) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (b) the consideration relates solely to past performance and (c) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company evaluates factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment.

Other contingent payments in which a portion of the payment is refundable or adjusts based on future performance or non-performance (e.g., through a penalty or claw-back provision) are not considered to relate solely to the Company’s past performance, and therefore, not considered substantive. Non-substantive contingent payments are classified as deferred revenue if they are ultimately expected to result in revenue recognition. The Company recognizes non-substantive contingent payments over the remaining estimated period of performance once the specific objective is achieved. Any portion of the non-substantive contingent payments which may be required to be refunded to the collaborator are not included in deferred revenue and instead are reflected as contingent liability to collaborator on the condensed consolidated balance sheets.

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Contingent payments associated with the achievement of specific ob jectives in certain contracts that are not considered substantive because the Company does not contribute effort to the achievement of such milestones are recognized as revenue upon achievement of the objective, as long as there are no undelivered elements remaining and no continuing performance obligations by the Company, assuming all other revenue recognition criteria are met.

Revenue from a government contract is recognized in the period during which the related costs are incurred and the related services are rendered, provided that the funds received are not refundable and applicable conditions under the government contract have been met. Funds received in advance are recorded as deferred revenue.

Comprehensive Loss

Comprehensive loss is composed of two components: net loss and other comprehensive loss. Other comprehensive loss refers to gains and losses that under U.S. GAAP are recorded as an element of stockholders’ equity, but are excluded from net loss. The Company’s other comprehensive loss includes foreign currency translation adjustments for the three and six months ended June 30, 2016 and 2015.

Net Loss per Share Attributable to Coherus

Basic net loss per share attributable to Coherus is calculated by dividing the net loss attributable to Coherus by the weighted-average number of shares of common stock outstanding for the period, without consideration for potential dilutive common shares. Diluted net loss per share is computed by dividing the net loss per share by the weighted average number of common shares outstanding for the period plus any dilutive potential common shares outstanding for the period determined using the treasury stock method for options to purchase common stock and using the if-converted method for the convertible notes. Since the Company was in a loss position for all periods presented, basic net loss per share attributable to Coherus is the same as diluted net loss per share attributable to Coherus as the inclusion of all potential dilutive common shares would have been anti-dilutive for all periods presented. Shares of founders’ common stock subject to repurchase are excluded from the calculation of weighted average shares as the vesting of such shares is contingent upon continued services being rendered by such holders.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,  Revenue from Contracts with Customers (“ASU 2014-09”), which converges the FASB and the International Accounting Standards Board standards on revenue recognition. Areas of revenue recognition that will be affected include, but are not limited to, transfer of control, variable consideration, allocation of transfer pricing, licenses, time value of money, contract costs and disclosures. In August 2015, the FASB issued ASU 2015-14,  Revenue from Contracts with Customers: Deferral of the Effective Date (“ASU 2015-14”). Under the amendments in ASU 2015-14 , the FASB deferred the effective date of ASU 2014-09 for public business entities to fiscal years beginning after December 15, 2017, including interim reporting periods within that reporting period, with early adoption permitted on the original effective date of fiscal years beginning after December 15, 2016 . The Company may adopt the new standard under the full retrospective method or the modified retrospective method. The Company is currently evaluating the method and the impact that the adoption of ASU 2014-09 will have on its consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern . ASU 2014-15 is effective for the Company’s annual reporting period ending December 31, 2016 and all annual and interim reporting periods thereafter, with early adoption permitted. The Company has not elected to early adopt this standard.  When adopted, ASU 2014-15 will require management to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern for at least 12 months from the issuance date of the financial statements and to provide related footnote disclosures.

In January 2016, the FASB issued ASU No. 2016-1, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-1 makes amendments to the classification and measurement of financial instruments and revises the accounting related to: (1) the classification and measurement of investments in equity securities, and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. In addition, the update also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-1 is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2018, and all annual and interim reporting periods thereafter. E arly adoptions of certain amendments within the update are permitted.  The Company is currently evaluating the impact that the adoption of ASU 2016-1 will have on its consolidated financial statements and related disclosures.

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In February 2016, the FASB issued ASU No. 2016-2, Leases . ASU 2016-2 is aimed at making leasing activities more transparent and comparable, and requires substantially that all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. ASU 2016-2 is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2019, and all annual and interim reporting periods thereafter. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-2 will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-9, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting . ASU 2016-9 simplifies several aspects of the accounting for share-based payment award transactions, including: (1) the income tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. ASU 2016-9 is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2017, and all annual and interim reporting periods thereafter. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-9 will have on its consolidated financial statements and related disclosures.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing (ASU 2016-10). The amendments in this update clarify the following two aspects:  identifying performance obligations and clarifying the licensing implementation guidance.   The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09.  The Company is currently evaluating the impact that the adoption of ASU 2016-10 will have on its consolidated financial statements and related disclosures.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients (ASU 2016-12). The amendments in this update, which were issued in response to the feedback received by the FASB-IASB joint revenue recognition transition resource group, clarify the following aspects: collectibility, presentation of sales tax and other similar taxes collected from customers, noncash consideration, contract modifications and completed contracts at transition, and transition technical correction. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09.  The Company is currently evaluating the impact that the adoption of ASU 2016-12 will have on its consolidated financial statements and related disclosures.

As of January 1, 2016, the Company adopted ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs , that requires debt issuance costs related to a recognized debt liability to be presented in the consolidated balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU 2015-03 requires retrospective application. ASU 2015-03 is limited to the presentation of debt issuance costs applied retrospectively to all prior periods presented in the consolidated financial statements and does not affect the recognition and measurement of debt issuance costs.

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

Financial assets and liabilities are recorded at fair value. The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximate their fair value due to their short maturities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The accounting guidance describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last is considered unobservable. These levels of inputs are the following:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s financial instruments consist of Level 1 assets and Level 3 liabilities. Where quoted prices are available in an active market, securities are classified as Level 1. Level 1 assets consist of highly liquid money market funds that are included in cash and cash equivalents, and restricted cash. There were no unrealized gains and losses in the Company’s investments in these money market funds.

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In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3. Level 3 liabilities consist of the contingent consideratio n.

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

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

Contingent Consideration

As part of the InteKrin acquisition in February 2014, the Company recognized contingent consideration associated with potential payments to be made to the former InteKrin stockholders upon the achievement of certain events specified in the agreements. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.

The InteKrin purchase agreement provides for contingent consideration to be paid upon (i) the first dosing of a human subject in the first Phase 2 Clinical Trial for CHS-131 ("Earn-Out Payment") and (ii) per a compound transaction agreement as defined in the purchase agreement (the “Compound Transaction Payment”). On March 6, 2015, the Company achieved the first dosing of a human subject in a phase 2 clinical trial for CHS-131 in multiple sclerosis patients, triggering the obligation to settle the first contingent Earn-Out Payment to former InteKrin stockholders. As a result, the Company recognized the additional fair value of the Earn-Out Payment of $4.1 million to other expense, net in the condensed consolidated statement of operations on March 6, 2015 and reclassified the contingent consideration liability balance related to the Earn-Out Payment to equity.

This fair value measurement of the Compound Transaction Payment uses a probability-weighted discounted cash flow approach based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The Compound Transaction analysis applied a 25% risk-adjusted discount rate to measure present value and also captured an additional 7% credit spread for counterparty credit risk given the cash payment.  The Company’s management estimates of probability of occurrence and timing were used to formulate an expected cash flow. During the second quarter of 2016, the Company reported positive Phase 2b efficacy data on CHS-131, in relapsing remitting multiple sclerosis, and as such management’s probability of occurrence increased from 10% to 33% at June 30, 2016. Generally, increases or decreases in the probability of occurrence would result in a directionally similar impact in the fair value measurement of the Compound Transaction Payment and it is estimated that a 1% increase (decrease) in the probability of occurrence would result in a fair value fluctuation of approximately $0.2 million.  

The change in the fair value of the Compound Transaction Payment was recognized in other expense, net within the condensed consolidated statement of operations of $5.1 million and $5.3 million for the three and six months ended June 30, 2016, respectively, and $65,000 and $140,000 for the three and six months ended June 30, 2015, respectively.

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The following table sets fo rth a summary of changes in the estimated fair value of the contingent consideration (in thousands):

Convertible Notes

The estimated fair value of the 8.2% Convertible Senior Notes Due 2022, which the Company issued on February 29, 2016 (see Note 6) is based on an income approach. The estimated fair value was approximately $120.4 million (par value $100.0 million) as of June 30, 2016 and represents a Level 3 valuation. When determining the estimated fair value of the Company’s long-term debt, the Company uses a single factor binomial lattice model which incorporates the terms and conditions of the convertible notes and market based risk measurement that are indirectly observable, such as credit risk. The lattice model produces an estimated fair value based on changes in the price of the underlying common shares price over successive periods of time. An estimated yield based on market data is used to discount straight debt cash flows.

Depreciation and amortization expense was $729,000 and $400,000 for the three months ended June 30, 2016 and 2015, respectively, and $1,446,000 and $632,000 for the six months ended June 30, 2016 and 2015, respectively.

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The Company recognized revenue related to the collaboration and license agreements for the periods presented as follows (in thousands):

Daiichi Sankyo

In January 2012, the Company entered into a license agreement with Daiichi Sankyo, under which the Company granted certain licenses to Daiichi Sankyo to develop and commercialize biosimilar forms of etanercept and rituximab in Japan, Taiwan, and South Korea, with an option to develop in China. Upon execution of the agreement, Daiichi Sankyo paid a non-refundable, upfront license fee of $10.0 million which was recorded as deferred revenue and is being amortized over the remaining estimated performance period under the agreement using the straight line method.

In June 2013, the Company and Daiichi Sankyo entered into a Memorandum of Understanding No. 1 (the “MOU 1”) in which both parties agreed to cooperate and share costs to conduct a global Phase 1 study of a biosimilar form of etanercept. This program was not originally contemplated in the license agreement. The amounts received from Daiichi Sankyo under the MOU 1 are recognized as a reduction in research and development expense as the Company engages in a research and development project jointly with Daiichi Sankyo, with both parties incurring costs while actively participating in development activities and both parties sharing costs and potential benefits of the arrangement.

In January 2014, the Company and Daiichi Sankyo entered into the Memorandum of Understanding No. 2 (the “MOU 2”) in which both parties agreed to cooperate to conduct a global Phase 3 clinical trial in rheumatoid arthritis and that Daiichi Sankyo will be responsible for a minimum of 20% of the cost of the clinical trial. Also, both parties entered into a clinical supply agreement contemporaneously with the MOU 2 in which the Company will supply finished study drug and study comparator drug for Daiichi Sankyo’s use in the Japanese portion of the product’s clinical trial. Daiichi Sankyo reimburses these research and development costs in quarterly advance payments, for which the Company records as advance payments under license agreement in the condensed consolidated balance sheet. The Company recognizes the advance payments as a reduction in the research and development expense when the research and development activity has been performed.

In June 2015, the Company and Daiichi Sankyo entered into the Memorandum of Understanding No. 3 (the “MOU 3”) in which both parties agreed to cooperate further on a global Phase 3 clinical in rheumatoid arthritis. Under the MOU 3, Daiichi Sankyo will be responsible for a minimum of 20% of the cost of an open label, safety extension study (“OLSES”) in rheumatoid arthritis. The Company also entered into a clinical supply agreement as part of the MOU 3 in which the Company will supply finished study drug and study comparator drug for Daiichi Sankyo’s use in the Japanese portion of the clinical trial. Daiichi Sankyo will pre-pay these research and development costs quarterly, for which the Company records as advance payments under license agreement in the condensed consolidated balance sheet. The Company recognizes the advance payments as a reduction of research and development expense when the research and development activity has been performed. In July 2016, the Company entered into two memorandums of understanding with Daiichi Sankyo (see Note 11).

As of June 30, 2016, $2.1 million of revenue was deferred under all arrangements with Daiichi Sankyo, of which $1.2 million was included in current liabilities and $0.9 million was included in non-current liabilities in the condensed consolidated balance sheet. As of December 31, 2015, $2.8 million of revenue was deferred under all arrangements with Daiichi Sankyo, of which $1.5 million was included in current liabilities and $1.3 million was included in non-current liabilities in the condensed consolidated balance sheet

The Company recognized in its condensed consolidated statements of operations a reduction of research and development expense related to the costs reimbursed by Daiichi Sankyo of $2.9 million and $2.5 million for the three months ended June 30, 2016 and 2015, respectively, and $4.0 million and $3.9 million for the six months ended June 30, 2016 and 2015, respectively.

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Baxalta

In August 2013, the Company entered into a license agreement with Baxalta (then Baxter International, Inc.), to develop and commercialize an etanercept biosimilar molecule, CHS-0214, worldwide, excluding the United States, Japan, Taiwan, South Korea, China and most of the Caribbean and South American nations (the “Original Agreement”). Under the terms of the license agreement, the Company will conduct the development and the regulatory activities, and Baxalta will conduct the commercialization of the etanercept biosimilar product.

In consideration of the exclusive, royalty-bearing license to develop, commercialize and use the etanercept biosimilar product, Baxalta made an upfront payment of $30.0 million to the Company. Additionally, the Company was eligible to receive up to $216.0 million in contingent payments composed of $96.0 million in clinical development payments and up to $120.0 million in regulatory milestone payments.  In February 2014, the agreement was amended to increase the payment by $5.3 million. Therefore, the Company became eligible to receive up to $221.3 million in contingent payments comprised of $101.3 million in clinical development payments and up to $120.0 million in regulatory milestone payments.

The upfront payment of $30.0 million and clinical development payments of up to $101.3 million include $71.3 million of contingent payments that are intended to cover development related expenses incurred by the Company, but which are potentially reimbursable, in part, to Baxalta under certain limited circumstances. Additionally, the amounts that are contingent payments also contain a claw-back feature providing that, in the event that the Company commercializes the etanercept biosimilar molecule in the U.S., 50% of those contingent payments are refundable to Baxalta. Therefore, the Company recorded the portion of the non-substantive contingent payment that contains the claw-back feature as the contingent liability to collaborator on the condensed consolidated balance sheets, and the portion of the non-substantive milestone payments that does not contain the claw-back feature was recorded as deferred revenue and recognized as collaboration and license revenue on a straight-line basis over the remaining estimated performance period.  The $120.0 million of regulatory milestone payments which was considered substantive will be recognized as revenue when each specific event is achieved.

In April 2015, the Company and Baxalta, entered into a second amendment (the “Second Amendment”) to the license agreement. Under the terms of the Second Amendment, a revised milestone payment structure totaling $130.0 million replaced certain existing milestone and funding obligations under the license agreement as originally executed.  The Second Amendment does not provide for any change in the contracted deliverables set forth in the license agreement. As a result, the original assessment of the standalone value for the deliverables remains unchanged and the deferred revenue previously recorded prior to the Second Amendment continues to be recognized as revenue on a straight-line basis over the remaining expected performance period.  Likewise, the contingent liability from the incremental milestones received under the license agreement prior to Second Amendment has not been adjusted.  

If the Company commercializes CHS-0214, its etanercept biosimilar product, in the United States, the Company will be required to refund a portion of the milestone payments received from Baxalta as specified in the Second Amendment. A portion of each of the $130.0 million milestone payments would be subject to refund. The Company concluded that the payments that contain potentially reimbursable amounts to Baxalta are not for substantive milestones under the relevant accounting guidance, since the guidance does not allow the substantive milestone components of a payment to be bifurcated from non-substantive milestone components. Therefore, the Company will record the portion of the contingent payment that contains the claw-back feature as a liability for the potential reimbursement of such funds to Baxalta until the earlier to occur of: (1) expiration of the license agreement pursuant to its terms in August 2023, (2) the earlier termination of the license agreement, or (3) the determination, pursuant to the terms of the license agreement, of the third party to commercialize CHS-0214 in the U.S. This liability is included in the contingent liability to collaborator on the condensed consolidated balance sheets. The portion of the milestone payment that does not contain the claw-back feature will be recorded as deferred revenue and recognized as license revenue on a straight-line basis over the remaining estimated performance period. The Company determined that there is no other method that is more appropriate than the straight-line method of revenue recognition for this agreement given there is no discernable pattern of performance under the arrangement.

Pursuant to the Original Agreement and the Second Amendment, the Company received a total of $235.3 million in milestone payments as of June 30, 2016, which are subject to a claw-back feature.  Therefore, the Company recorded $76.8 million as contingent liability to collaborator and $158.5 million as deferred revenue which is being amortized over the remaining estimated performance period using the straight line method. The Company also received $10.0 million for the achievement of a substantive milestone in the third quarter of 2014, which was recognized as revenue upon receipt.

As of June 30, 2016, $85.8 million of revenue was deferred under the arrangements with Baxalta, of which $59.9 million was included in current liabilities and $25.9 million was included in non-current liabilities in the condensed consolidated balance sheet. As of June 30, 2016, $76.8 million was recorded as contingent liability to collaborator due to the potential refund of such amount to Baxalta in the future.

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As of December 31, 2015, $92.0 million of revenue was deferred under the arrangements with Baxalta, of which $48.0 million was included in current liabilities and $44.0 million was inc luded in non-current liabilities in the condensed consolidated balance sheet. As of December 31, 2015, $66.3 million was recorded as contingent liability to collaborator in the condensed consolidated balance sheet due to the potential refund to Baxalta.

On February 29, 2016, the Company issued and sold $100.0 million aggregate principal amount of its 8.2% Convertible Senior Notes (the “Convertible Notes”) and received total net proceeds of approximately $99.2 million, after deducting issuance costs of $0.8 million.  The Convertible Notes constitute general, senior unsubordinated obligations of the Company and are guaranteed by certain subsidiaries of the Company. The Convertible Notes bear interest at a fixed coupon rate of 8.2% per annum payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, which commenced on March 31, 2016, and mature on March 31, 2022, unless earlier converted, redeemed or repurchased. If the Company fails to satisfy certain registration or reporting requirements, then additional interest will accrue on the Convertible Notes at a rate of up to 0.50% per annum in the aggregate. The Convertible Notes also bear a premium of 9% of their principal amount, which is payable when the Convertible Notes mature or are repurchased or redeemed by the Company.  

The Convertible Notes were issued to Healthcare Royalty Partners III, L.P., for $75.0 million in aggregate principal amount, and to three related party investors, KKR Biosimilar L.P., MX II Associates LLC, and KMG Capital Partners, LLC, for $20.0 million, $4.0 million, and $1.0 million, respectively, in aggregate principal amount.

The Convertible Notes are convertible at the option of the holder at any time prior to the close of business on the business day immediately preceding March 31, 2022 at the initial conversion rate of 44.7387 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $22.35 per share, and is subject to adjustment in certain events. Upon conversion of the Convertible Notes by a holder, the holder will receive shares of the Company’s common stock together, if applicable, with cash in lieu of any fractional share.

The Convertible Notes are redeemable in whole, and not in part, at the Company’s option on or after March 31, 2020, 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 Convertible Notes. At maturity or redemption, if not earlier converted, the Company will pay 109% of the principal amount of the Convertible Notes maturing or being redeemed, together with accrued and unpaid interest, in cash.

The Convertible Notes contain customary events of default (as defined in the Convertible Note purchase agreement), the occurrence of which could result in the acceleration of all amounts due under the Convertible Notes.  These events of default include, among others, certain failures to pay amounts due on the Convertible Notes, to deliver the consideration due upon conversion or to settle uninsured judgments, decrees or orders exceeding $10.0 million, and certain defaults on other indebtedness for money borrowed of at least $10.0 million, insolvency-related events and breaches of representations, subject, in some cases, to a cure period. The Convertible Notes also contain covenants restricting the Company’s ability to incur additional indebtedness for borrowed money or convertible preferred stock and to pay dividends or make distributions on the Company’s equity interests, subject to certain exceptions.  As of June 30, 2016, the Company was in full compliance with these covenants and there were no events of default under the Convertible Notes.

The Convertible Notes are accounted for in accordance with ASC Subtopic 470-20, Debt with Conversion and Other Options . Pursuant to ASC Subtopic 470-20, the Company evaluated the features embedded in the Convertible Notes and concluded that the embedded features are not required to be bifurcated and accounted for separately from the host debt instrument.

The Company granted the holders of the Convertible Notes certain registration rights requiring the Company to register, under the Securities Act of 1933, as amended, the resale of the shares of common stock issuable upon conversion or settlement of the Convertible Notes.

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The following ta ble summarizes information about the components of the Convertible Notes as of June 30, 2016 (in thousands):

The following table presents the components of interest expense for the three and six month periods ended June 30, 2016 (in thousands):

The remaining unamortized debt discount and debt offering costs related to the Company’s Convertible Notes of approximately $9.4 million as of June 30, 2016, will be amortized using the effective interest rate over the remaining term of the Convertible Notes of 5.75 years. The annual effective interest rate is 9.48% for the Convertible Notes.

Future payments on the Convertible Notes as of June 30, 2016 are as follows (in thousands):

Purchase Commitments

The Company enters into contracts in the normal course of business with contract research organizations for preclinical studies and clinical trials and contract manufacturing organizations (“CMOs”) for the manufacture of clinical trial materials. As of June 30, 2016, the Company had a commitment of $12.5 million with CMOs for the manufacture of clinical trial material due within a year.

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Guarantees and Indemnifications

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations. The Company would assess the likelihood of any adverse judgments or related claims, as well as ranges of probable losses. In the cases where the Company believes that a reasonably possible or probable loss exists, it will disclose the facts and circumstances of the claims, including an estimate range, if possible. The Company is subject to one claim and consequently recorded a related liability of $50,000 in 2015. The claim was settled and agreed to by both parties in July 2016.

Common Stock

In January 2016, the Company’s shelf registration statement on Form S-3 (File No. 333-208625) (the “Shelf Registration Statement”) was declared effective by the SEC. In May and June 2016, the Company drew 4,025,000 shares of common stock down from the Shelf Registration Statement and issued and sold 4,025,000 shares of common stock at a price of $18.00 per share. The Company received total gross proceeds from the offering of $72.5 million. After deducting underwriting discounts and commissions of $3.0 million and offering expense of $0.5 million, the net proceeds were $69.0 million.

2016 Employment Commencement Incentive Plan

In June 2016, the Company adopted the 2016 Employment Commencement Incentive Plan (the “2016 Plan”). The 2016 Plan is designed to comply with the inducement exemption contained in Nasdaq’s Rule 5635(c)(4), which provides for the grant of non-qualified stock options, restricted stock units, restricted stock awards, performance awards, dividend equivalents, deferred stock awards, deferred stock units, stock payment and stock appreciation rights to a person not previously an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material to the individual’s entering into employment with the Company. The Company reserved for future issuance under the 2016 Plan a total of 1,000,000 shares of its common stock for new employees. The 2016 Plan does not provide for any annual increases in the number of shares available. As of June 30, 2016, there were no awards issued under the 2016 Plan.

Stock-Based Compensation

During 2010 and 2011, the Company issued shares of restricted common stock to its founders under our founders’ shares agreements (such shares, the “Founders’ Shares”). As of June 30, 2016, all shares were fully vested and there were no shares subject to repurchase. The Company recognized stock-based compensation expense within its condensed consolidated statement of operations of $3,000 and $9,000 for the three and six months ended June 30, 2015, respectively, and recognized no expense in 2016 related to shares of common stock granted pursuant to the Founders’ Shares agreements.

The stock-based compensation expense recorded related to options granted to employees and nonemployees was as follows (in thousands):

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The following table sets forth the computation of the basic and diluted net loss per share attributable to Coherus (in thousands, except share and per share data):

The following outstanding potentially dilutive securities consisting of stock options and the shares issuable upon conversion of the Convertible Notes are considered to be potential shares but are excluded from the calculation of diluted net loss per share because their effect would be antidilutive:

Transactions Associated with Medpace Agreement

One member of the Company’s board of directors is also the chief executive officer of Medpace. As such, Medpace was deemed to be a related party. As June 30, 2016, the Company had $6.3 million in prepaid assets (prepaid clinical, material, manufacturing and other–related parties), $2.4 million in accounts payable–related parties, and $6.4 million in accrued and other liabilities (accrued clinical, manufacturing and other–related parties), all reflected on the Company’s condensed consolidated balance sheet associated with Medpace. As of December 31, 2015, the Company had $10.9 million in prepaid assets (prepaid clinical, material, manufacturing and other–related parties), $3.5 million in accounts payable–related parties, and $6.1 million in accrued and other liabilities (accrued clinical, manufacturing and other–related parties), all reflected on the Company’s consolidated balance sheet associated with Medpace. The Company recognized $10.9 million and $12.1 million during the three months ended June 30, 2016 and 2015, respectively, and $24.0 million and $23.6 million during the six months ended June 30, 2016 and 2015, respectively, for services rendered by Medpace within research and development expense in the condensed consolidated statements of operations.

Recruiting Services

One member of the Company’s board of directors was the chief executive officer of a company that provided recruiting services to the Company. As of June 30, 2016 and December 31, 2015, the Company did not have any related party balances in the Company’s condensed consolidated balance sheet related to recruiting services. The Company recorded in research and development expense in its condensed consolidated statements of operations, $0 and $258,000 for the three months ended June 30, 2016 and 2015, respectively, and $131,000 and $258,000 for the six months ended June 30, 2016 and 2015, respectively, for services rendered by the recruiting company. The Company recorded in general and administrative expense in its condensed consolidated statements of operations, $50,000 and $277,000 for the three months ended June 30, 2016 and 2015, respectively, and $50,000 and $343,000 for the six months ended June 30, 2016 and 2015, respectively, for services rendered by the recruiting company.

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Convertible Notes  

In February 2016, the Company issued Convertible Notes to certain related parties (some companies affiliated with members of the Company’s board of directors), for an aggregate principal amount of $25.0 million (see Note 6 for related party disclosure).

In July 2016, the Company entered into two memorandums of understanding, or MOUs, with Daiichi Sankyo. Under these MOUs, the Company will receive up to $1.9 million for reimbursements of certain past costs incurred and to be incurred. Approximately $1.2 million of costs were incurred in the first six months of 2016, but will be recognized as an offsetting expense in the quarter ending September 30, 2016.

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