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Note 1. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include those of Cerus Corporation and its subsidiary, Cerus Europe B.V. (collectively referred to hereinafter as “Cerus” or the “Company”) after elimination of all intercompany accounts and transactions. These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of only normal recurring entries, considered necessary for a fair presentation have been made. Operating results for the three and nine months ended September 30, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013, or for any future periods.
These condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2012, which were included in the Company’s 2012 Annual Report on Form 10-K, filed with the SEC on March 12, 2013. The accompanying balance sheet as of December 31, 2012, has been derived from the Company’s audited financial statements as of that date.
Use of Estimates
The preparation of financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from those estimates under different assumptions or conditions.
Revenue
The Company recognizes revenue in accordance with ASC Topic 605-25, “Revenue Recognition—Arrangements with Multiple Deliverables,” as applicable. Revenue is recognized when (i) persuasive evidence of an agreement with the funding party exists; (ii) services have been rendered or product has been delivered; (iii) pricing is fixed or determinable; and (iv) collection is reasonably assured. The Company’s main sources of revenues for the three and nine months ended September 30, 2013, and 2012, were product revenue from sales of the INTERCEPT Blood System for platelets and plasma (“platelet and plasma systems”) and United States government grants and awards.
Revenue related to product sales is generally recognized when the Company fulfills its obligations for each element of an agreement. For all sales of the Company’s INTERCEPT Blood System products, the Company uses a binding purchase order and signed sales contract as evidence of a written agreement. The Company sells its platelet and plasma systems directly to blood banks, hospitals, universities, government agencies, as well as to distributors in certain regions. Generally, the Company’s contracts with its customers do not provide for open return rights, except within a reasonable time after receipt of goods in the case of defective or non-conforming product. Deliverables and the units of accounting vary according to the provisions of each purchase order or sales contract. For revenue arrangements with multiple elements, the Company determines whether the delivered elements meet the criteria as separate units of accounting. Such criteria require that the deliverable have stand-alone value to the customer and that if a general right of return exists relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. Once the Company determines if the deliverable meets the criteria for a separate unit of accounting, the Company must determine how the consideration should be allocated between the deliverables and how the separate units of accounting should be recognized as revenue. Consideration received is allocated to elements that are identified as discrete units of accounting based on the best estimated selling price. The Company has determined that vendor specific objective evidence is not discernible due to the Company’s limited history of selling its products and variability in its pricing across the regions into which it sells its products. Since the Company’s products are novel and unique and are not sold by others, third-party evidence of selling price is unavailable.
At both September 30, 2013, and December 31, 2012, the Company had $0.1 million of short-term deferred revenue on its condensed consolidated balance sheets related to future performance obligations. Freight costs charged to customers are recorded as a component of revenue under ASC Topic 605, “Accounting for Shipping and Handling Fees and Costs.” Value-added-taxes (“VAT”) that the Company invoices to its customers and remits to governments are recorded on a net basis, which excludes such VAT from product revenue.
Revenue related to the cost reimbursement provisions under development contracts or United States government grants is recognized as the costs on the projects are incurred. The Company has received certain United States government grants and contracts that support research in defined research projects. These grants generally have provided for reimbursement of approved costs incurred as defined in the various grants.
Research and Development Expenses
In accordance with ASC Topic 730, “Accounting for Research and Development Expenses,” research and development expenses are charged to expense when incurred, including cost incurred under each grant that has been awarded to the Company by the United States government or development contracts. Research and development expenses include salaries and related expenses for scientific personnel, payments to consultants, supplies and chemicals used in in-house laboratories, costs of research and development facilities, depreciation of equipment and external contract research expenses, including clinical trials, preclinical safety studies, other laboratory studies, process development and product manufacturing for research use.
The Company’s use of estimates in recording accrued liabilities for research and development activities (see “Use of Estimates” above) affects the amounts of research and development expenses recorded and revenue recorded from development funding and government grants and collaborative agreements. Actual results may differ from those estimates under different assumptions or conditions.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be classified as cash equivalents. These investments primarily consist of money market instruments, and are classified as available-for-sale.
Short-Term Investments
Investments with original maturities of greater than three months but less than one year from the date of purchase as well as available-for-sale investments with original maturities of greater than one year from the date of purchase, which included corporate bonds and United States government agency securities, are classified as short-term investments. In accordance with ASC Topic 320, “Accounting for Certain Investments in Debt and Equity Securities,” the Company has classified all debt securities as available-for-sale at the time of purchase and reevaluates such designation as of each balance sheet date. Available-for-sale securities are carried at estimated fair value. Unrealized gains and losses derived by changes in the estimated fair value of available-for-sale securities are recorded in “Accumulated other comprehensive income” on the Company’s condensed consolidated balance sheets and in “Net unrealized losses on available-for-sale securities, net of taxes” on the Company’s condensed consolidated statements of comprehensive loss. Realized gains and losses from the sale or maturity of available-for-sale investments are recorded in “Other income, net” on the Company’s condensed consolidated statements of operations. The cost of securities sold is based on the specific identification method. The Company reports the amortization of any premium and accretion of any discount resulting from the purchase of debt securities as a component of interest expense.
The Company also reviews all of its marketable securities on a regular basis to evaluate whether any security has experienced an other-than-temporary decline in fair value. Other-than-temporary declines in market value are recorded in “Other income (expense), net” on the Company’s condensed consolidated statements of operations.
Restricted Cash
The Company holds a certificate of deposit with a domestic bank for any potential decommissioning resulting from the Company’s possession of radioactive material. The certificate of deposit is held to satisfy the financial surety requirements of the California Department of Health Services and is recorded in “Restricted cash” on the Company’s condensed consolidated balance sheets.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments and accounts receivable.
Pursuant to the Company’s investment policy, substantially all of the Company’s cash, cash equivalents and short-term investments are maintained at two major financial institutions of high credit standing. The Company monitors the financial credit worthiness of the issuers of its investments and limits the concentration in individual securities and types of investments that exist within its investment portfolio. Generally, all of the Company’s investments carry high credit quality ratings, which is in accordance with its investment policy. At September 30, 2013, the Company does not believe there is significant financial risk from non-performance by the issuers of the Company’s cash equivalents.
Concentrations of credit risk with respect to trade receivables exist. However, in connection with the Company’s revolving line of credit, as discussed in Note 8 in the Notes to Condensed Consolidated Financial Statements, the Company purchased a credit insurance policy that mitigates some of its credit risk, as the policy will pay either the Company or its lender on eligible claims filed on its outstanding receivables. On a regular basis, including at the time of sale, the Company performs credit evaluations of its customers. Generally, the Company does not require collateral from its customers to secure accounts receivable. To the extent that the Company determines specific invoices or customer accounts may be uncollectible, the Company reserves against the accounts receivable on its condensed consolidated balance sheets and records a charge on its condensed consolidated statements of operations. The Company has not historically experienced significant bad debt and accordingly has not maintained an allowance for doubtful accounts.
The Company had three customers that accounted for more than 10% of the Company’s outstanding trade receivables at both September 30, 2013, and December 31, 2012. These customers cumulatively represented approximately 55% and 59% of the Company’s outstanding trade receivables, at September 30, 2013 and December 31, 2012, respectively. To date, the Company has not experienced collection difficulties from these customers.
Inventories
At September 30, 2013, and December 31, 2012, inventory consisted of work-in-process and finished goods only. Finished goods include INTERCEPT disposable kits, UVA illumination devices (“illuminators”), and certain replacement parts for the illuminators. Platelet and plasma systems’ disposable kits generally have a two-year life from the date of manufacture. Illuminators and replacement parts do not have regulated expiration dates. Work-in-process includes certain components that are manufactured over a protracted length of time, which can exceed one year, before being incorporated and assembled by Fresenius Kabi AG (“Fresenius”) into the finished INTERCEPT disposable kits. The Company maintains an inventory balance based on its current sales projections, and at each reporting period, the Company evaluates whether its work-in-process inventory would be consumed for production of finished units in order to sell to existing and prospective customers within the next twelve-month period. It is not customary for the Company’s production cycle for inventory to exceed twelve months. Instead, the Company uses its best judgment to factor in lead times for the production of its finished units to meet the Company’s current demands. If actual results differ from those estimates, work-in-process inventory could potentially accumulate for periods exceeding one year. At September 30, 2013 and December 31, 2012, the Company classified its work-in-process inventory as a current asset on its condensed consolidated balance sheets based on its evaluation that the work-in-process inventory would be consumed for production and subsequently sold within each respective subsequent twelve-month period.
Inventory is recorded at the lower of cost, determined on a first-in, first-out basis, or market value. The Company uses significant judgment to analyze and determine if the composition of its inventory is obsolete, slow-moving or unsalable and frequently reviews such determinations. Generally, the Company writes-down specifically identified unusable, obsolete, slow-moving, or known unsalable inventory that has no alternative use in the period that it is first recognized by using a number of factors including product expiration dates, open and unfulfilled orders, and sales forecasts. Any write-down of its inventory to net realizable value establishes a new cost basis and will be maintained even if certain circumstances suggest that the inventory is recoverable in subsequent periods. Costs associated with the write-down of inventory are recorded in “Cost of product revenue” on the Company’s condensed consolidated statements of operations.
Property and Equipment, net
Property and equipment is comprised of furniture, equipment, information technology hardware and software and is recorded at cost. At the time the property and equipment is ready for its intended use, it is depreciated on a straight-line basis over the estimated useful lives of the assets (generally three to five years). Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful lives of the improvements.
Goodwill and Intangible Assets, net
Additions to goodwill and intangible assets, net are derived at the time of a business acquisition, in which the Company assigns the total consideration transferred to the acquired assets based on each asset’s fair value and any residual amount becomes goodwill, an indefinite life intangible asset. Intangible assets, net, which include a license for the right to commercialize the INTERCEPT Blood System in Asia, are subject to ratably amortized over the estimated useful life of ten years. The amortization of the Company’s intangible assets, net, is recorded in “Amortization of intangible assets” on the Company’s condensed consolidated statements of operations.
Goodwill is not amortized but instead is subject to an impairment test performed on an annual basis, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. The Company evaluates goodwill on an annual basis on August 31 of each fiscal year. The test for goodwill impairment is a two-step process. The first step compares the fair value of each reporting unit with its respective carrying amount, including goodwill. The Company has determined that it operates in one reporting unit and estimates the fair value of its one reporting unit using the enterprise approach under which it considers the quoted market capitalization of the Company as reported on the Nasdaq Global Market. The Company considers quoted market prices that are available in active markets to be the best evidence of fair value. The Company also considers other factors, which include future forecasted results, the economic environment and overall market conditions. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and, therefore, the second step of the impairment test is unnecessary. The second step, which is used to measure the amount of impairment loss, compares the implied fair value of each reporting unit’s goodwill with the respective carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
See Note 5 in the Notes to Condensed Consolidated Financial Statements for further information regarding the Company’s impairment analysis and the valuation of goodwill and intangible assets, net.
Long-lived Assets
The Company evaluates its long-lived assets for impairment by continually monitoring events and changes in circumstances that could indicate carrying amounts of its long-lived assets may not be recoverable. When such events or changes in circumstances occur, the Company assesses recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the expected undiscounted future cash flows are less than the carrying amount of these assets, the Company then measures the amount of the impairment loss based on the excess of the carrying amount over the fair value of the assets. The Company did not recognize impairment charges related to its long-lived assets during the three and nine months ended September 30, 2013, and 2012.
Foreign Currency Remeasurement
The functional currency of the Company’s foreign subsidiary is the United States dollar. Monetary assets and liabilities denominated in foreign currencies are remeasured in United States dollars using the exchange rates at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are remeasured in United States dollars using historical exchange rates. Revenues and expenses are remeasured using average exchange rates prevailing during the period. Remeasurements are recorded in the Company’s condensed consolidated statements of operations. The Company recorded foreign currency gains (losses) of $0.4 million and $0.2 million during the three months ended September 30, 2013, and 2012, respectively, and $0.2 million and $(0.05) during the nine months ended September 30, 2013, and 2012, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation—Stock Compensation.” Stock-based compensation expense is measured at the grant-date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period, and is adjusted for estimated forfeitures. To the extent that stock options contain performance criteria for vesting, stock-based compensation is recognized once the performance criteria are probable of being achieved.
For stock-based awards issued to non-employees, the Company follows ASC Topic 505-50, “Equity Based Payment to Non-Employees” and considers the measurement date at which the fair value of the stock-based award is measured to be the earlier of (i) the date at which a commitment for performance by the grantee to earn the equity instrument is reached or (ii) the date at which the grantee performance is complete. The Company recognizes stock-based compensation expense for the fair value of the vested portion of the non-employee stock-based awards in its condensed consolidated statements of operations.
See Note 11 in the Notes to Condensed Consolidated Financial Statements for further information regarding the Company’s stock-based compensation assumptions and expenses.
Warrant Liability
In August 2009, and November 2010, the Company issued warrants to purchase an aggregate of 2.4 million and 3.7 million shares of common stock, respectively. The material terms of the warrants were identical under each issuance except for the exercise price, date issued and expiration date. The Company classified the warrants as a liability on its condensed consolidated balance sheets as the warrants contain certain material terms which require the Company (or its successor) to purchase the warrants for cash in an amount equal to the value of the unexercised portion of the warrants (as determined in accordance with the Black-Scholes option pricing model) in connection with certain change of control transactions. In addition, the Company may also be required to pay cash to a warrant holder under certain circumstances if the Company is unable to timely deliver the shares acquired upon warrant exercise to such holder.
The fair value of these outstanding warrants is calculated using the binomial-lattice option-pricing model and is adjusted accordingly at each reporting period. The binomial-lattice option-pricing model requires that the Company uses significant assumptions and judgment to determine appropriate inputs to the model. Some of the assumptions that the Company relies on include the probability of a change of control occurring, the volatility of the Company’s stock over the life of the warrant and assumptions and inputs used to value the warrants under the Black-Scholes model should a change of control occur.
Changes resulting from the revaluation of warrants to fair value are recorded in “Revaluation of warrant liability” on the condensed consolidated statements of operations. Upon the exercise or modification to remove the provisions which require the warrants to be treated as a liability, the fair value of the warrants will be reclassified from a liability to stockholders’ equity on the Company’s condensed consolidated balance sheets and no further adjustment to the fair value would be made in subsequent periods.
See Note 10 in the Notes to Condensed Consolidated Financial Statements for further information regarding the Company’s valuation of warrant liability.
Income Taxes
The Company accounts for income taxes using an asset and liability approach in accordance with ASC Topic 740 “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. ASC Topic 740 requires derecognition of tax positions that do not have a greater than 50% likelihood of being recognized upon review by a taxing authority having full knowledge of all relevant information. Use of a valuation allowance as described in ASC Topic 740 is not an appropriate substitute for the derecognition of a tax position. The Company did not have any recorded liabilities for unrecognized tax benefits at September 30, 2013 or December 31, 2012. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its income tax expense. To date, the Company has not recognized any interest and penalties in its condensed consolidated statements of operations, nor has its accrued for or made payments for interest and penalties. The Company continues to carry a full valuation allowance on all of its deferred tax assets. Although the Company believes it more likely than not that a taxing authority would agree with its current tax positions, there can be no assurance that the tax positions the Company has taken will be substantiated by a taxing authority if reviewed. The Company’s tax years 1998 through 2012 remain subject to examination by the taxing jurisdictions.
Net Loss Per Common Share
Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per common share gives effect to all potentially dilutive common shares outstanding for the period. The potentially dilutive securities include stock options, employee stock purchase plan rights, warrants and restricted stock units, which are calculated using the treasury stock method, and convertible preferred stock, which is calculated using the if-converted method. Diluted loss per common share also gives effect to potential adjustments to the numerator for changes resulting from the revaluation of warrants to fair value for the period, even if the Company is in a net loss position if the effect would result in more dilution.
Diluted loss per common share used the same weighted average number of common shares outstanding for the three months ended September 30, 2013 and the nine months ended September 30, 2013, and 2012, as calculated for the basic loss per common share as the inclusion of any potential dilutive securities would be anti-dilutive. In addition, certain potential dilutive securities were excluded from the dilution calculation for the three months ended September 30, 2012, as their inclusion would have been anti-dilutive.
The following table sets forth the reconciliation of the numerator and denominator used in the computation of basic and diluted net loss per common share for the three and nine months ended September 30, 2013, and 2012 (in thousands, except per share amounts):
| Three Months Ended September 30, |
Nine Months Ended September 30, |
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| 2013 | 2012 | 2013 | 2012 | |||||||||||||
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Numerator: |
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Net loss used for basic calculation |
$ | (20,501 | ) | $ | (3,460 | ) | $ | (37,477 | ) | $ | (14,201 | ) | ||||
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Effect of revaluation of warrant liability |
— | (873 | ) | — | — | |||||||||||
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Adjusted net loss used for diluted calculation |
$ | (20,501 | ) | $ | (4,333 | ) | $ | (37,477 | ) | $ | (14,201 | ) | ||||
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Denominator: |
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Basic weighted average number of common shares outstanding |
69,791 | 54,875 | 66,464 | 54,130 | ||||||||||||
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Effect of dilutive potential common shares resulting from warrants |
— | 502 | — | — | ||||||||||||
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Diluted weighted average number of common shares outstanding |
69,791 | 55,377 | 66,464 | 54,130 | ||||||||||||
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Net loss per common share: |
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Basic |
$ | (0.29 | ) | $ | (0.06 | ) | $ | (0.56 | ) | $ | (0.26 | ) | ||||
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Diluted |
$ | (0.29 | ) | $ | (0.08 | ) | $ | (0.56 | ) | $ | (0.26 | ) | ||||
The table below presents common shares underlying stock options, convertible preferred stock, employee stock purchase plan rights, warrants and restricted stock units that are excluded from the calculation of the weighted average number of common shares outstanding used for the calculation of diluted net loss per common share. These are excluded from the calculation due to their anti-dilutive effect for the three and nine months ended September 30, 2013, and 2012 (shares in thousands):
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Three Months Ended September 30, |
Nine Months
Ended September 30, |
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| 2013 | 2012 | 2013 | 2012 | |||||||||||||
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Anti-dilutive common shares |
16,651 | 8,704 | 16,301 | 14,813 | ||||||||||||
Guarantee and Indemnification Arrangements
The Company recognizes the fair value for guarantee and indemnification arrangements issued or modified by the Company after December 31, 2002. In addition, the Company monitors the conditions that are subject to the guarantees and indemnifications in order to identify if a loss has occurred. If the Company determines it is probable that a loss has occurred, then any such estimable loss would be recognized under those guarantees and indemnifications. Some of the agreements that the Company is a party to contain provisions that indemnify the counter party from damages and costs resulting from claims that the Company’s technology infringes the intellectual property rights of a third party or claims that the sale or use of the Company’s products have caused personal injury or other damage or loss. The Company has not received any such requests for indemnification under these provisions and has not been required to make material payments pursuant to these provisions.
The Company generally provides for a one-year warranty on certain of its INTERCEPT blood-safety products covering defects in materials and workmanship. The Company accrues costs associated with warranty obligations when claims become known and are estimable. During the year ended December 31, 2012, the Company provided for warranty obligations related to replacement costs for certain of its products that the Company identified were defective or had the potential of being defective. In connection with the warranty obligations provided for in relation to certain of its products during the year ended December 31, 2012, the Company filed a warranty claim against Fresenius, which Fresenius accepted. As a result, the Company recorded a current asset of $1.8 million on its consolidated balance sheet as of December 31, 2012 representing the full amount of the warranty claim against Fresenius as Fresenius was obliged to supply the Company with replacement products or credit notes for those defective or potentially defective products. The Company also wrote-down the value of certain unsalable inventory of $1.7 million related to these products as an offsetting warranty claim against Fresenius as of December 31, 2012. As of September 30, 2013, the Company no longer has a warranty claim against Fresenius and all unsalable inventory related to this incident has been returned to Fresenius. During the three months ended March 31, 2013, the Company identified a separate production defect related to unsold inventory. The Company’s third party manufacturer has taken responsibility for the cost of replacing such damaged goods, therefore, the Company has borne no costs associated with these defects. Prior to these incidents, there have been very few warranty costs incurred. As a result, the Company did not accrue for any potential future warranty costs at September 30, 2013. In addition, the Company believes that the defective products and those that had the potential of being defective identified during the three months ended March 31, 2013 and during the year ended December 31, 2012 are isolated.
Fair Value of Financial Instruments
The Company determines the fair value relating to its financial assets and liabilities. The carrying amounts of accounts receivables, accounts payable, and other accrued liabilities approximate their fair value due to the relative short-term maturities. Based on the borrowing rates currently available to the Company for loans with similar terms, the Company believes the fair value of its debt approximates their carrying amounts. The Company measures and records certain financial assets and liabilities at fair value on a recurring basis, including its available-for-sale securities and warrant liability. The Company classifies financial instruments within Level 1 if quote prices are available in active markets, which include its money market funds as the money market funds are actively traded in markets and their market price can be readily determined. The Company classifies instruments in Level 2 if the instruments are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. These instruments include the Company’s available-for-sale securities related to United States government agencies. The available-for-sale securities are held by a custodian who obtains investment prices from a third party pricing provider that uses standard inputs to models which vary by asset class. The Company classifies instruments in Level 3 if one or more significant inputs or significant value drivers are unobservable, which include its warrant liability. The Company assesses any transfers among fair value measurement levels at the end of each reporting period.
See Note 2 and 10 in the Notes to Condensed Consolidated Financial Statements for further information regarding the Company’s valuation on financial instruments.
New Accounting Pronouncements
In February 2013, Accounting Standards Codification Topic 220, Comprehensive Income, was amended to require additional information about amounts reclassified out of accumulated other comprehensive income. We adopted this guidance beginning January 1, 2013, and will provide the additional information when such reclassifications occur. The amendment did not have a material effect on our consolidated financial statements.
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Note 2. Fair Value on Financial Instruments
We determine the fair value of an asset or liability based on the assumptions that market participants would use in pricing the asset or liability in an orderly transaction between market participants at the measurement date. The identification of market participant assumptions provides a basis for determining what inputs are to be used for pricing each asset or liability. A fair value hierarchy has been established which gives precedence to fair value measurements calculated using observable inputs over those using unobservable inputs. This hierarchy prioritizes the inputs into three broad levels as follows:
| • | Level 1: Quoted prices in active markets for identical instruments |
| • | Level 2: Other significant observable inputs (including quoted prices in active markets for similar instruments) |
| • | Level 3: Significant unobservable inputs (including assumptions in determining the fair value of certain investments) |
To estimate the fair value of Level 2 debt securities as of September 30, 2013 our primary pricing service relies on inputs from multiple industry-recognized pricing sources to determine the price for each investment. Corporate debt and United States government agency securities are systematically priced by this service as of the close of business each business day. If the primary pricing services does not price a specific asset a secondary pricing services are utilized.
The fair values of certain of the Company’s financial assets and liabilities were determined using the following inputs at September 30, 2013 (in thousands):
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
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Money market funds (1) |
$ | 7,862 | $ | 7,862 | $ | — | $ | — | ||||||||
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Corporate debt securities (2) |
24,948 | — | 24,948 | — | ||||||||||||
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United States government agency securities (2) |
4,023 | — | 4,023 | — | ||||||||||||
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Total financial assets |
$ | 36,833 | $ | 7,862 | $ | 28,971 | $ | — | ||||||||
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Warrant liability |
$ | 22,706 | $ | — | $ | — | $ | 22,706 | ||||||||
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Total financial liabilities |
$ | 22,706 | $ | — | $ | — | $ | 22,706 | ||||||||
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| (1) | Included in cash and cash equivalents on the Company’s condensed consolidated balance sheets. |
| (2) | Included in short-term investments on the Company’s condensed consolidated balance sheets. |
The fair values of certain of the Company’s financial assets and liabilities were determined using the following inputs at December 31, 2012 (in thousands):
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
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Money market funds (1) |
$ | 10,268 | $ | 10,268 | $ | — | $ | — | ||||||||
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Total financial assets |
$ | 10,268 | $ | 10,268 | $ | — | $ | — | ||||||||
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Warrant liability |
$ | 5,903 | $ | — | $ | — | $ | 5,903 | ||||||||
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Total financial liabilities |
$ | 5,903 | $ | — | $ | — | $ | 5,903 | ||||||||
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| (1) | Included in cash and cash equivalents on the Company’s condensed consolidated balance sheets. |
A reconciliation of the beginning and ending balances for warrant liability using significant unobservable inputs (Level 3) from December 31, 2012, to September 30, 2013, was as follows (in thousands):
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Balance at December 31, 2012 |
$ | 5,903 | ||
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Increase in fair value of warrants |
16,803 | |||
|
Settlement of warrants exercised |
— | |||
|
|
|
|||
|
Balance at September 30, 2013 |
$ | 22,706 | ||
|
|
|
See Note 1 and 10 in the Notes to Condensed Consolidated Financial Statements for further information regarding the Company’s valuation techniques and unobservable inputs for warrant liability using significant unobservable inputs (Level 3).
The Company did not have any transfers among fair value measurement levels during the nine months ended September 30, 2013.
|
|||
Note 3. Available-for-sale Securities
The following is a summary of available-for-sale securities at September 30, 2013 (in thousands):
| September 30, 2013 | ||||||||||||
| Amortized Cost | Gross Unrealized Loss |
Fair Value | ||||||||||
|
Money market funds |
$ | 7,862 | $ | 7,862 | ||||||||
|
United States government agency securities |
4,027 | (4 | ) | 4,023 | ||||||||
|
Corporate debt securities |
24,977 | (29 | ) | 24,948 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Total available-for-sale securities |
$ | 36,866 | $ | (33 | ) | $ | 36,833 | |||||
|
|
|
|
|
|
|
|||||||
The fair value of the Company’s available-for-sales securities equaled cost at December 31, 2012.
Available-for-sale securities at September 30, 2013 and December 31, 2012, consisted of the following by original contractual maturity (in thousands):
| September 30, 2013 | December 31, 2012 | |||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
|
Due in one year or less |
$ | 24,509 | $ | 24,492 | $ | 10,268 | $ | 10,268 | ||||||||
|
Due greater than one year and less than five years |
12,357 | 12,341 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total available-for-sale securities |
$ | 36,866 | $ | 36,833 | $ | 10,268 | $ | 10,268 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The maturities of certain short-term investments were estimated primarily based upon assumed prepayment features and credit enhancement characteristics.
Gross realized gains from the sale or maturity of available-for-sale investments were zero during each of the three and nine month periods ended September 30, 2013 and 2012. The Company did not record losses on investments experiencing an other-than-temporary decline in fair value nor did it record any gross realized losses from the sale or maturity of available-for-sale investments during the three and nine months ended September 30, 2013, and 2012.
|
|||
Note 4. Inventories
Inventories at September 30, 2013 and December 31, 2012, consisted of the following (in thousands):
| September 30, 2013 |
December 31, 2012 |
|||||||
|
Work-in-process |
$ | 4,810 | $ | 3,551 | ||||
|
Finished goods |
7,876 | 6,629 | ||||||
|
|
|
|
|
|||||
|
Total inventories |
$ | 12,686 | $ | 10,180 | ||||
|
|
|
|
|
|||||
|
|||
Note 5. Goodwill and Intangible Assets, net
Goodwill
During the three and nine months ended September 30, 2013, the Company did not dispose of, impair, or recognize additional goodwill. Accordingly, at both September 30, 2013, and December 31, 2012, the carrying amount of goodwill was $1.3 million. The Company performed its annual review of goodwill on August 31, 2013, and noted no indicators of impairment as of that date.
Intangible Assets, net
The following is a summary of intangible assets, net at September 30, 2013 (in thousands):
| September 30, 2013 | ||||||||||||
| Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||
|
Acquisition-related intangible assets: |
||||||||||||
|
Reacquired license - INTERCEPT Asia |
$ | 2,017 | $ | (622 | ) | $ | 1,395 | |||||
|
|
|
|
|
|
|
|||||||
|
Total intangible assets |
$ | 2,017 | $ | (622 | ) | $ | 1,395 | |||||
|
|
|
|
|
|
|
|||||||
The following is a summary of intangible assets, net at December 31, 2012 (in thousands):
| December 31, 2012 | ||||||||||||
| Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||
|
Acquisition-related intangible assets: |
||||||||||||
|
Reacquired license - INTERCEPT Asia |
$ | 2,017 | $ | (471 | ) | $ | 1,546 | |||||
|
|
|
|
|
|
|
|||||||
|
Total intangible assets |
$ | 2,017 | $ | (471 | ) | $ | 1,546 | |||||
|
|
|
|
|
|
|
|||||||
The Company recognized $0.05 million in amortization expense related to intangible assets for each of the three months ended September 30, 2013, and 2012, and $0.15 million for each of the nine months ended September 30, 2013, and 2012. During the three and nine months ended September 30, 2013, and 2012, there were no impairment charges recognized related to the acquired intangible assets.
At September 30, 2013, the expected annual amortization expense of the intangible assets, net is $0.05 million for the remaining three months of 2013, $0.2 million each subsequent year thereafter beginning with the year ending December 31, 2014, through the year ending December 31, 2019, and $0.1 million for the year ending December 31, 2020.
|
|||
Note 6. Long-Term Investments
In connection with the agreements to license the immunotherapy technologies to Aduro BioTech (“Aduro”) in 2009, the Company received preferred shares of Aduro. Pursuant to these license agreements, the Company is eligible to receive a 1% royalty fee on any future sales resulting from the licensed technology. As of September 2013, the Company’s ownership in Aduro was less than 3% on a fully diluted basis. The carrying value of the Company’s investment in Aduro is zero in its condensed consolidated balance sheets as of December 31, 2012 and September 30, 2013. As of September 30, 2013 the Company has not received any royalties under this agreement.
|
|||
Note 7. Accrued Liabilities
Accrued liabilities at September 30, 2013 and December 31, 2012, consisted of the following (in thousands):
| September 30, 2013 |
December 31, 2012 |
|||||||
|
Accrued compensation and related costs |
$ | 2,588 | $ | 2,692 | ||||
|
Accrued inventory costs |
5,115 | 2,352 | ||||||
|
Accrued contract and other accrued expenses |
4,357 | 2,575 | ||||||
|
|
|
|
|
|||||
|
Total accrued liabilities |
$ | 12,060 | $ | 7,619 | ||||
|
|
|
|
|
|||||
|
|||
Note 8. Debt
Debt at September 30, 2013, consisted of the following (in thousands):
| September 30, 2013 | ||||||||||||
| Principal | Unamortized Discount |
Total | ||||||||||
|
Comerica - Revolving Line of Credit, due 2014 |
$ | 3,638 | — | $ | 3,638 | |||||||
|
|
|
|
|
|
|
|||||||
|
Total debt |
3,638 | — | 3,638 | |||||||||
|
Less: debt - current |
(3,638 | ) | — | (3,638 | ) | |||||||
|
|
|
|
|
|
|
|||||||
|
Debt - non-current |
$ | — | — | $ | — | |||||||
|
|
|
|
|
|
|
|||||||
Debt at December 31, 2012, consisted of the following (in thousands):
| December 31, 2012 | ||||||||||||
| Principal | Unamortized Discount |
Total | ||||||||||
|
Comerica - Growth Capital Loan A, due 2015 |
$ | 4,583 | $ | (49 | ) | $ | 4,534 | |||||
|
Comerica - Revolving Line of Credit, due 2014 |
3,190 | — | 3,190 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total debt |
7,773 | (49 | ) | 7,724 | ||||||||
|
Less: debt - current |
(4,857 | ) | 29 | (4,828 | ) | |||||||
|
|
|
|
|
|
|
|||||||
|
Debt - non-current |
$ | 2,916 | $ | (20 | ) | $ | 2,896 | |||||
|
|
|
|
|
|
|
|||||||
Principal and interest payments on debt at September 30, 2013, are expected to be as follows for each of the following five years (in thousands):
|
Year ended December 31, |
||||
|
2013 (remaining three months) |
$ | 40 | ||
|
2014 (1) |
3,740 | |||
|
2015 |
— | |||
|
2016 |
— | |||
|
2017 |
— | |||
| (1) | Included outstanding revolving line of credit balance based on the Company’s obligation to repay the outstanding revolving line of credit balance at the end of the revolving line of credit term. |
2011 Growth Capital Facility
The Company entered into a loan and security agreement on September 30, 2011, as amended effective on December 13, 2011, and June 30, 2012, with Comerica Bank (“Comerica”) (collectively, the “Amended Credit Agreement”). The Amended Credit Agreement provides for an aggregate borrowing of up to $12.0 million, comprised of a growth capital loan of $5.0 million (“Growth Capital Loan”) and a formula based revolving line of credit (“RLOC”) of up to $7.0 million. The Company pledged all current and future assets, excluding its intellectual property and 35% of the Company’s investment in its subsidiary, Cerus Europe B.V., as security for borrowings under the Amended Credit Agreement.
Growth Capital Loan
Concurrent with the execution of the Amended Credit Agreement, in September 2011, the Company borrowed $5.0 million under the Growth Capital Loan, substantially all of which was used to repay the Company’s prior debt with Oxford Finance Corporation (“Oxford”), with the remainder used for general corporate purposes. The Growth Capital Loan, which was scheduled to mature on September 30, 2015, and bore a fixed interest rate of 6.37%, with interest–only payments due for the first twelve months, followed by equal principal and interest payments for the remaining 36 months. In April 2013, the Company repaid in full the Growth Capital Loan balance and all accrued interest as well as a scheduled final payment fee of $0.05 million, in an aggregate amount of $4.2 million. The Company has no further obligations under the Growth Capital Loan.
In September 2011, the Company incurred a commitment fee of $40,000 and loan fees of $50,000, which were recorded as a discount to its Growth Capital Loan and were being amortized as a component of interest expense using the effective interest method over the term of the Growth Capital Loan (discount was based on an implied interest rate of 7.07%). The Company was also required to make a final payment fee of 1% of the amounts drawn under the Growth Capital Loan due on its prepayment of the Growth Capital Loan. The final payment fee was accreted to interest expense using the effective interest method over the life of the Growth Capital Loan upon draw. The remaining unaccreted balance of the final payment fee and unamortized discount was taken as an interest charge in April 2013 in connection with the repayment of that loan.
Revolving Line of Credit
The Amended Credit Agreement also provides for a RLOC of up to $7.0 million (the “RLOC Loan Amount”). The amount available under the RLOC is limited to the lesser of (i) 80% of eligible trade receivables or (ii) the RLOC Loan Amount. At September 30, 2013, and December 31, 2012, the Company had $3.6 million and $3.2 million, respectively, outstanding under the RLOC. The Company is required to repay the principal drawn from the RLOC at the end of the RLOC term on June 30, 2014, or earlier if a portion or all of the outstanding RLOC exceeds the amount available under the RLOC. The RLOC bears a floating rate based on the lender’s prime rate plus 1.50%, with interest–only payments due each month. At both September 30, 2013, and December 31, 2012, the floating rate of the RLOC was at 4.75%. In September 2011, the Company incurred a commitment fee of $20,000. Upon amendment of the loan and security agreement in June 2012, the Company incurred another annual commitment fee of $20,000 and received a credit for the unused portion of the initial fee. The Company incurs a $20,000 commitment fee at each annual anniversary beginning June 30, 2013.
Compliance with Covenants
The Company is required to maintain compliance with certain customary and routine financial covenants under the Amended Credit Agreement, including maintaining a minimum cash balance of $2.5 million at Comerica and achieving minimum revenue levels, which are measured monthly based on a six-month trailing basis and must be at least 75% of the pre-established future projected revenues for the trailing six-month period. Non-compliance with the covenants could result in the principal of the note becoming due and payable. As of September 30, 2013, the Company was in compliance with the financial covenants as set forth in the Amended Credit Agreement.
|
|||
Note 9. Commitments and Contingencies
Operating Leases
The Company leases its office facilities, located in Concord, California and Amersfoort, The Netherlands, and certain equipment under non-cancelable operating leases with initial terms in excess of one year that require the Company to pay operating costs, property taxes, insurance and maintenance. The operating leases expire at various dates through 2019, with certain of the leases providing for renewal options, provisions for adjusting future lease payments, which is based on the consumer price index and the right to terminate the lease early, which may occur as early as January 2015. In June 2013 the Company entered into a new lease for additional space in Concord. The lease has a two year initial term with four (4) two year options for the Company to renew. The lease commences on August 1, 2013 and obligates the Company to make rent payments of $51,456, $154,368 and $90,048 in 2013, 2014 and 2015, respectively. The Company’s leased facilities qualify as operating leases under ASC Topic 840, “Leases” and as such, are not included on its condensed consolidated balance sheets.
Financed Leasehold Improvements
In December 2010, the Company financed $1.1 million of leasehold improvements. The Company pays for the financed leasehold improvements as a component of rent and is required to reimburse its landlord over the remaining life of the respective leases. If the Company exercises its right to early terminate the Concord California lease, which may occur as early as January 2015, the Company would be required to repay for any remaining portion of the landlord financed leasehold improvements at such time. At September 30, 2013, the Company had an outstanding liability of $0.7 million related to these leasehold improvements, of which $0.1 million was reflected in “Accrued liabilities” and $0.6 million was reflected in “Other non-current liabilities” on the Company’s condensed consolidated balance sheets.
Purchase Commitments
The Company is party to agreements with certain providers for certain components of INTERCEPT Blood System which the Company purchases from third party manufacturers and supplies to Fresenius at no cost for use in manufacturing finished INTERCEPT disposable kits. Certain of these agreements require minimum purchase commitments from the Company.
|
|||
Note 10. Stockholders’ Equity
Series B Preferred Stock
In March 1999, the Company issued 3,327 shares of the Company’s Series B preferred stock to Fresenius Kabi AG (“Fresenius”) (formerly, Baxter International Inc.). The Series B preferred stock had no voting rights, except with respect to the authorization of any class or series of stock having preference or priority over the Series B preferred stock as to voting, liquidation or conversion or with respect to the determination of fair value of non-publicly traded shares received by the holder of Series B preferred stock in the event of a liquidation, or except as required by Delaware law. At any time, the holder had the ability to convert each share of Series B preferred stock into 100 shares of the Company’s common stock. The Company had the right to redeem the Series B preferred stock prior to conversion for a payment of $9.5 million. In June 2012, Fresenius exercised its right to convert all 3,327 shares of the Company’s Series B preferred stock. As a result, the Company issued 332,700 shares of its common stock to Fresenius and retired the outstanding Series B preferred stock.
Common Stock and Associated Warrant Liability
In August 2009, the Company received net proceeds of approximately $12.1 million, after deducting placement agent’s fees and stock issuance costs of approximately $1.1 million, from a registered direct offering of 6.0 million units. Each unit sold consisted of one share of common stock and a warrant to purchase 4/10 of a share of common stock. Each unit was sold for $2.20, resulting in the issuance of 6.0 million shares of common stock and warrants to purchase 2.4 million shares of common stock, exercisable at an exercise price of $2.90 per share. The warrants issued in August 2009 (“2009 Warrants”) are exercisable for a period of five years from the issue date. The fair value on the date of issuance of the 2009 Warrants was determined to be $2.8 million using the binomial-lattice option valuation model and applying the following assumptions: (i) a risk-free rate of 2.48%, (ii) an expected term of 5.0 years, (iii) no dividend yield and (iv) a volatility of 77%.
In November 2010, the Company received net proceeds of approximately $19.7 million, after deducting underwriting discounts and commissions and stock issuance costs of approximately $1.3 million, from an underwritten public offering of 7.4 million units. Each unit sold consisted of one share of common stock and a warrant to purchase 1/2 of a share of common stock. Each unit was sold for $2.85, resulting in the issuance of 7.4 million shares of common stock and warrants to purchase 3.7 million shares of common stock, exercisable at an exercise price of $3.20 per share. The warrants issued in November 2010 (“2010 Warrants”) became exercisable on May 15, 2011 and are exercisable for a period of five years from the issue date. The fair value on the date of issuance of the 2010 Warrants was determined to be $5.8 million using the binomial-lattice option valuation model and applying the following assumptions: (i) a risk-free rate of 1.23%, (ii) an expected term of 5.0 years, (iii) no dividend yield and (iv) a volatility of 85%.
The fair value of the 2009 Warrants and 2010 Warrants was recorded on the condensed consolidated balance sheets as a liability pursuant to “Accounting for Derivative Instruments and Hedging Activities” and “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” Topics of ASC and will be adjusted to fair value at each financial reporting date thereafter until the earlier of exercise or modification to remove the provisions which require the warrants to be treated as a liability, at which time, these warrants would be reclassified into stockholders’ equity. The Company classified the 2009 Warrants and 2010 Warrants as a liability as these warrants contain certain provisions that, under certain circumstances, which may be out of the Company’s control, could require the Company to pay cash to settle the exercise of the warrants or may require the Company to redeem the warrants.
The fair value of the warrants at September 30, 2013, and December 31, 2012, consisted of the following (in thousands):
| September 30, 2013 |
December 31, 2012 |
|||||||
|
2009 Warrants |
$ | 9,203 | $ | 2,009 | ||||
|
2010 Warrants |
13,503 | 3,894 | ||||||
|
|
|
|
|
|||||
|
Total warrant liability |
$ | 22,706 | $ | 5,903 | ||||
|
|
|
|
|
|||||
The fair value of the Company’s warrants was based on using the binomial-lattice option valuation model and using the following assumptions at September 30, 2013, and December 31, 2012:
| September 30, 2013 |
December 31, 2012 |
|||||||
|
2009 Warrants: |
||||||||
|
Expected term (in years) |
0.90 | 1.65 | ||||||
|
Estimated volatility |
43 | % | 45 | % | ||||
|
Risk-free interest rate |
0.10 | % | 0.25 | % | ||||
|
Expected dividend yield |
0 | % | 0 | % | ||||
|
2010 Warrants: |
||||||||
|
Expected term (in years) |
2.11 | 2.86 | ||||||
|
Estimated volatility |
41 | % | 51 | % | ||||
|
Risk-free interest rate |
0.33 | % | 0.36 | % | ||||
|
Expected dividend yield |
0 | % | 0 | % | ||||
For the three months ended September 30, 2013, and 2012, the Company recorded a non-cash charge of $12.4 million and non-cash gain of $0.9 million, respectively, on its condensed consolidated statements of operations within non-operating income (expense), net, due to the changes in fair value of the warrants. For the nine months ended September 30, 2013, and 2012, the Company recorded a non-cash charge of $16.8million and a non-cash gain of $0.1 million, respectively, on its condensed consolidated statements of operations within non-operating income (expense), net, due to the changes in fair value of the warrants. Significant changes to the Company’s market price for its common stock will impact the fair value the warrants. As a result, any significant increases in the Company’s stock price will likely create an increase to the fair value of warrant liability. At September 30, 2013, the 2010 Warrants to purchase 5,084 shares of common stock had been exercised.
Sales Agreements
The Company entered into an At-The-Market Issuance Sales Agreement in June 2011, as amended in January 2012 and August 2012 (collectively, the “MLV Agreement”), with MLV & Co. LLC, formerly McNicoll, Lewis & Vlak LLC (“MLV”) that provides for the issuance and sale of shares of the Company’s common stock over the term of the MLV Agreement having an aggregate offering price of up to $20.0 million through MLV. Under the MLV Agreement, MLV acts as the Company’s sales agent and receives compensation based on an aggregate of 3% of the gross proceeds on the sale price per share of its common stock. The issuance and sale of these shares by the Company pursuant to the MLV Agreement are deemed an “at-the-market” offering and are registered under the Securities Act. Over the term of the MLV Agreement, approximately 6.6 million shares of the Company’s common stock were sold under the MLV Agreement for aggregate net proceeds of $19.2 million. At September 30, 2013, the Company had less than $0.1 million of common stock available to be sold under the MLV Agreement. During the nine months ended September 30, 2013, the Company had no sales of its common stock under the MLV Agreement.
The Company also entered into a Controlled Equity OfferingSM Sales Agreement (the “Cantor Agreement”) in August 2012, with Cantor Fitzgerald & Co. (“Cantor”) that provides for the issuance and sale of shares of its common stock over the term of the Cantor Agreement having an aggregate offering price of up to $30.0 million through Cantor. Under the Cantor Agreement, Cantor also acts as the Company’s sales agent and receives compensation based on an aggregate of 2% of the gross proceeds on the sale price per share of its common stock. The issuance and sale of these shares by the Company pursuant to the Cantor Agreement are deemed an “at-the-market” offering and are registered under the Securities Act. During the year ended December 31, 2012, approximately 1.4 million shares of the Company’s common stock were sold under the Cantor Agreement for aggregate net proceeds of $4.3 million. During the nine months ended September 30, 2013, approximately 3.8 million shares of the Company’s common stock were sold under the Cantor Agreement for aggregate net proceeds of $13.0 million, all of which were sold in the first quarter of 2013. At September 30, 2013, the Company had approximately $12.5 million of common stock available to be sold under the Cantor Agreement.
Public Offering of Common Stock
The Company completed a public offering of common stock on March 19, 2013. As a result of this offering, the Company issued approximately 8.3 million shares of its common stock at $4.20 per share. The Company provided the underwriters an overallotment of an additional approximately 1.3 million shares of its common stock, which was fully subscribed. Combined gross proceeds for the offering were approximately $40.3 million. Net proceeds to the Company were approximately $38.0 million after underwriters’ discount of approximately $1.8 million and offering costs of approximately $0.5 million.
Stockholder Rights Plan
In October 2009, the Company’s Board of Directors adopted an amendment to its 1999 stockholder rights plan, commonly referred to as a “poison pill,” to reduce the exercise price, extend the expiration date and revise certain definitions under the plan. The stockholder rights plan is intended to deter hostile or coercive attempts to acquire the Company. The stockholder rights plan enables stockholders to acquire shares of the Company’s common stock, or the common stock of an acquirer, at a substantial discount to the public market price should any person or group acquire more than 15% of the Company’s common stock without the approval of the Board of Directors under certain circumstances. The Company has designated 250,000 shares of Series C Junior Participating preferred stock for issuance in connection with the stockholder rights plan.
|
|||
Note 11. Stock-Based Compensation
The Company maintains an equity compensation plan to provide long-term incentives for employees, contractors, and members of its Board of Directors. The Company currently grants equity awards from one plan, the 2008 Equity Incentive Plan (the “2008 Plan”). The 2008 Plan allows for the issuance of non-statutory and incentive stock options, restricted stock, restricted stock units, stock appreciation rights, other stock-related awards, and performance awards which may be settled in cash, stock, or other property. The Company continues to have equity awards outstanding under its previous stock plans: 1998 Non-Officer Stock Option Plan and 1999 Equity Incentive Plan (collectively, the “Prior Plans”) and 1996 Equity Incentive Plan (the “1996 Plan”). Equity awards issued under the Prior Plans and the 1996 Plan continue to adhere to the terms of those respective stock plans and no further options may be granted under those previous plans. However, at June 2, 2008, any shares that remained available for future grants under the Prior Plans became available for issuance under the 2008 Plan. On June 6, 2012, and June 12, 2013, the stockholders approved an amendments to the 2008 Plan (“Amended 2008 Plan”) which increased the aggregate number of shares of common stock authorized for issuance by 3,000,000 and 6,000,000 shares, respectively, such that the Amended 2008 Plan has reserved for issuance an amount not to exceed 19,540,940 shares effective June 12, 2013. At September 30, 2013, the Company had an aggregate of approximately 12.7 million shares of its common stock reserved for issuance under the Amended 2008 Plan, the Prior Plans and the 1996 Plan, of which approximately 10.6 million shares were subject to outstanding options and other stock-based awards, and approximately 8.1 million shares were available for future issuance under the Amended 2008 Plan.
The Company also maintains an Employee Stock Purchase Plan (the “Purchase Plan”) which is intended to qualify as an employee stock purchase plan within the meaning of Section 423(b) of the Internal Revenue Code. Under the Purchase Plan, the Company’s Board of Directors may authorize participation by eligible employees, including officers, in periodic offerings. On June 6, 2012, the stockholders approved an amendment to the Purchase Plan to increase the aggregate number of shares of common stock authorized for issuance by 500,000 shares, such that the Purchase Plan has reserved for issuance an amount not to exceed 1,320,500 shares. At September 30, 2013, the Company had approximately 0.5 million shares available for future issuance under the Purchase Plan.
The Company has granted restricted stock units to its senior management in accordance with the Amended 2008 Plan. Subject to each grantee’s continued employment, the restricted stock units vest in three annual installments from the date of grant and are generally issuable at the end of the three-year vesting term.
Activity under the Company’s equity incentive plans related to stock options is set forth below (in thousands except per share amounts):
| Number of Options Outstanding |
Weighted Average Exercise Price per Share |
|||||||
|
Balance at December 31, 2012 |
8,504 | $ | 3.40 | |||||
|
Granted |
2,503 | 3.69 | ||||||
|
Forfeited |
(111 | ) | 3.19 | |||||
|
Expired |
(189 | ) | 6.71 | |||||
|
Exercised |
(177 | ) | 2.50 | |||||
|
|
|
|||||||
|
Balance at September 30, 2013 |
10,530 | $ | 3.43 | |||||
|
|
|
|||||||
The Company currently uses the Black-Scholes option pricing model to determine the grant-date fair value of stock options and employee stock purchase plan shares. The Black-Scholes option pricing model is affected by the Company’s stock price, as well as assumptions regarding a number of complex and subjective variables, which include the expected term of the grants, actual and projected employee stock option exercise behaviors, including forfeitures, the Company’s expected stock price volatility, the risk-free interest rate and expected dividends. The Company recognizes the grant-date fair value of the stock award as stock-based compensation expense on a straight-line basis over the requisite service period, which is the vesting period, and is adjusted for estimated forfeitures.
Stock-based compensation recognized on the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2013, and 2012, was as follows (in thousands):
|
Three Months Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
|
Stock-based compensation expense by caption: |
||||||||||||||||
|
Research and development |
$ | 132 | $ | 146 | $ | 341 | $ | 423 | ||||||||
|
Selling, general and administrative |
729 | 549 | 2,074 | 1,488 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total stock-based compensation expense |
$ | 861 | $ | 695 | $ | 2,415 | $ | 1,911 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company did not record any stock-based compensation associated with performance-based stock options during the three and nine months ended September 30, 2013, and 2012, as the performance criteria was not probable of being achieved during these periods. Performance-based stock options of 50,000 remained outstanding at September 30, 2013.
|
|||
Note 12. License Agreements
The Company has certain agreements with Fresenius under which the Company pays royalties on future INTERCEPT Blood System product sales which utilize certain intellectual property rights held by Fresenius at royalty rates that vary by product: 10% of product sales for the platelet system, 3% of product sales for the plasma system, 5% of product sales for the red blood cell system, and 6.5% on sales of illuminators. During each the three months ended September 30, 2013, and 2012, the Company made separate royalty payments to Fresenius of $0.8 million and $0.7 million, respectively, and payments of $2.3 million and $2.1 million during the nine months ended September 30, 2013 and 2012, respectively. At both September 30, 2013, and December 31, 2012, the Company accrued royalties of $0.7 million and $0.8 million, respectively.
In December 2008, the Company extended its agreement with Fresenius to manufacture finished INTERCEPT disposable kits for the platelet and plasma systems through December 31, 2013. Under the amended manufacturing and supply agreement, the Company pays Fresenius a set price per kit, which is established annually, plus a fixed surcharge per kit. In addition, volume driven manufacturing overhead is to be paid or refunded if actual manufacturing volumes are lower or higher than the estimated production volumes. The Company made payments to Fresenius of $4.2 million and $1.4 million relating to the manufacturing of the Company products during the three months ended September 30, 2013, and 2012, respectively, and $11.8 million and $8.9 million, during the nine months ended September 30, 2013 and 2012, respectively. At September 30, 2013, and December 31, 2012, the Company owed Fresenius $4.3 million and $6.2 million, respectively, for INTERCEPT disposable kits manufactured. In connection with the warranty claims incurred by the Company and remediation of those claims during the year ended December 31, 2012 (see Note 1 in the Notes to Condensed Consolidated Financial Statements under “Guarantee and Indemnification Arrangements” for more detail), the Company filed a warranty claim against Fresenius. Fresenius accepted the warranty claim and has supplied the Company with replacement product or credit notes. As a result, the Company recorded a current asset of $1.8 million on its consolidated balance sheets as of December 31, 2012 representing the full amount of the warranty claim against Fresenius. As of September 30, 2013 the Company no longer has a warranty claim against Fresenius and all unsalable inventory has been returned to Fresenius.
|
|||
Note 13. Segment, Customer and Geographic Information
The Company continues to operate in only one segment, blood safety. The Company’s chief executive officer is the chief operating decision maker who evaluates performance based on the net revenues and operating loss of the blood safety segment. The Company considers the sale of all of its INTERCEPT Blood System products to be similar in nature and function, and any revenue earned from services is minimal.
The Company’s operations outside of the United States include a wholly-owned subsidiary headquartered in Europe. The Company’s operations in the United States are responsible for the research and development and global commercialization of the INTERCEPT Blood System, as discussed in further detail below, while operations in Europe are responsible for the commercialization efforts of the platelet and plasma systems in Europe, The Commonwealth of Independent States and the Middle East. Product revenues are attributed to each region based on the location of the customer, and in the case of non-product revenues, on the location of the collaboration partner.
The Company had the following significant customers that accounted for more than 10% of the Company’s total product revenue, all of which operate in a country outside of the United States, during the three and nine months ended September 30, 2013, and 2012 (in percentages):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
|
Etablissement Francais du Sang |
20 | % | 22 | % | 18 | % | 23 | % | ||||||||
|
Movaco, S.A. |
19 | % | 19 | % | 16 | % | 19 | % | ||||||||
|
Bravo Pacific Limited |
11 | % | * | * | * | |||||||||||
|
Advanced Technology Comp. KSC |
10 | % | * | * | * | |||||||||||
|
AUM+ LTD |
* | 13 | % | * | * | |||||||||||
| * | Represents an amount less than 10% of product revenue. |
|
|||
Principles of Consolidation and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include those of Cerus Corporation and its subsidiary, Cerus Europe B.V. (collectively referred to hereinafter as “Cerus” or the “Company”) after elimination of all intercompany accounts and transactions. These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of only normal recurring entries, considered necessary for a fair presentation have been made. Operating results for the three and nine months ended September 30, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013, or for any future periods.
These condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2012, which were included in the Company’s 2012 Annual Report on Form 10-K, filed with the SEC on March 12, 2013. The accompanying balance sheet as of December 31, 2012, has been derived from the Company’s audited financial statements as of that date.
Use of Estimates
The preparation of financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from those estimates under different assumptions or conditions.
Revenue
The Company recognizes revenue in accordance with ASC Topic 605-25, “Revenue Recognition—Arrangements with Multiple Deliverables,” as applicable. Revenue is recognized when (i) persuasive evidence of an agreement with the funding party exists; (ii) services have been rendered or product has been delivered; (iii) pricing is fixed or determinable; and (iv) collection is reasonably assured. The Company’s main sources of revenues for the three and nine months ended September 30, 2013, and 2012, were product revenue from sales of the INTERCEPT Blood System for platelets and plasma (“platelet and plasma systems”) and United States government grants and awards.
Revenue related to product sales is generally recognized when the Company fulfills its obligations for each element of an agreement. For all sales of the Company’s INTERCEPT Blood System products, the Company uses a binding purchase order and signed sales contract as evidence of a written agreement. The Company sells its platelet and plasma systems directly to blood banks, hospitals, universities, government agencies, as well as to distributors in certain regions. Generally, the Company’s contracts with its customers do not provide for open return rights, except within a reasonable time after receipt of goods in the case of defective or non-conforming product. Deliverables and the units of accounting vary according to the provisions of each purchase order or sales contract. For revenue arrangements with multiple elements, the Company determines whether the delivered elements meet the criteria as separate units of accounting. Such criteria require that the deliverable have stand-alone value to the customer and that if a general right of return exists relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. Once the Company determines if the deliverable meets the criteria for a separate unit of accounting, the Company must determine how the consideration should be allocated between the deliverables and how the separate units of accounting should be recognized as revenue. Consideration received is allocated to elements that are identified as discrete units of accounting based on the best estimated selling price. The Company has determined that vendor specific objective evidence is not discernible due to the Company’s limited history of selling its products and variability in its pricing across the regions into which it sells its products. Since the Company’s products are novel and unique and are not sold by others, third-party evidence of selling price is unavailable.
At both September 30, 2013, and December 31, 2012, the Company had $0.1 million of short-term deferred revenue on its condensed consolidated balance sheets related to future performance obligations. Freight costs charged to customers are recorded as a component of revenue under ASC Topic 605, “Accounting for Shipping and Handling Fees and Costs.” Value-added-taxes (“VAT”) that the Company invoices to its customers and remits to governments are recorded on a net basis, which excludes such VAT from product revenue.
Revenue related to the cost reimbursement provisions under development contracts or United States government grants is recognized as the costs on the projects are incurred. The Company has received certain United States government grants and contracts that support research in defined research projects. These grants generally have provided for reimbursement of approved costs incurred as defined in the various grants.
Research and Development Expenses
In accordance with ASC Topic 730, “Accounting for Research and Development Expenses,” research and development expenses are charged to expense when incurred, including cost incurred under each grant that has been awarded to the Company by the United States government or development contracts. Research and development expenses include salaries and related expenses for scientific personnel, payments to consultants, supplies and chemicals used in in-house laboratories, costs of research and development facilities, depreciation of equipment and external contract research expenses, including clinical trials, preclinical safety studies, other laboratory studies, process development and product manufacturing for research use.
The Company’s use of estimates in recording accrued liabilities for research and development activities (see “Use of Estimates” above) affects the amounts of research and development expenses recorded and revenue recorded from development funding and government grants and collaborative agreements. Actual results may differ from those estimates under different assumptions or conditions.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be classified as cash equivalents. These investments primarily consist of money market instruments, and are classified as available-for-sale.
Short-Term Investments
Investments with original maturities of greater than three months but less than one year from the date of purchase as well as available-for-sale investments with original maturities of greater than one year from the date of purchase, which included corporate bonds and United States government agency securities, are classified as short-term investments. In accordance with ASC Topic 320, “Accounting for Certain Investments in Debt and Equity Securities,” the Company has classified all debt securities as available-for-sale at the time of purchase and reevaluates such designation as of each balance sheet date. Available-for-sale securities are carried at estimated fair value. Unrealized gains and losses derived by changes in the estimated fair value of available-for-sale securities are recorded in “Accumulated other comprehensive income” on the Company’s condensed consolidated balance sheets and in “Net unrealized losses on available-for-sale securities, net of taxes” on the Company’s condensed consolidated statements of comprehensive loss. Realized gains and losses from the sale or maturity of available-for-sale investments are recorded in “Other income, net” on the Company’s condensed consolidated statements of operations. The cost of securities sold is based on the specific identification method. The Company reports the amortization of any premium and accretion of any discount resulting from the purchase of debt securities as a component of interest expense.
The Company also reviews all of its marketable securities on a regular basis to evaluate whether any security has experienced an other-than-temporary decline in fair value. Other-than-temporary declines in market value are recorded in “Other income (expense), net” on the Company’s condensed consolidated statements of operations.
Restricted Cash
The Company holds a certificate of deposit with a domestic bank for any potential decommissioning resulting from the Company’s possession of radioactive material. The certificate of deposit is held to satisfy the financial surety requirements of the California Department of Health Services and is recorded in “Restricted cash” on the Company’s condensed consolidated balance sheets.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments and accounts receivable.
Pursuant to the Company’s investment policy, substantially all of the Company’s cash, cash equivalents and short-term investments are maintained at two major financial institutions of high credit standing. The Company monitors the financial credit worthiness of the issuers of its investments and limits the concentration in individual securities and types of investments that exist within its investment portfolio. Generally, all of the Company’s investments carry high credit quality ratings, which is in accordance with its investment policy. At September 30, 2013, the Company does not believe there is significant financial risk from non-performance by the issuers of the Company’s cash equivalents.
Concentrations of credit risk with respect to trade receivables exist. However, in connection with the Company’s revolving line of credit, as discussed in Note 8 in the Notes to Condensed Consolidated Financial Statements, the Company purchased a credit insurance policy that mitigates some of its credit risk, as the policy will pay either the Company or its lender on eligible claims filed on its outstanding receivables. On a regular basis, including at the time of sale, the Company performs credit evaluations of its customers. Generally, the Company does not require collateral from its customers to secure accounts receivable. To the extent that the Company determines specific invoices or customer accounts may be uncollectible, the Company reserves against the accounts receivable on its condensed consolidated balance sheets and records a charge on its condensed consolidated statements of operations. The Company has not historically experienced significant bad debt and accordingly has not maintained an allowance for doubtful accounts.
The Company had three customers that accounted for more than 10% of the Company’s outstanding trade receivables at both September 30, 2013, and December 31, 2012. These customers cumulatively represented approximately 55% and 59% of the Company’s outstanding trade receivables, at September 30, 2013 and December 31, 2012, respectively. To date, the Company has not experienced collection difficulties from these customers.
Inventories
At September 30, 2013, and December 31, 2012, inventory consisted of work-in-process and finished goods only. Finished goods include INTERCEPT disposable kits, UVA illumination devices (“illuminators”), and certain replacement parts for the illuminators. Platelet and plasma systems’ disposable kits generally have a two-year life from the date of manufacture. Illuminators and replacement parts do not have regulated expiration dates. Work-in-process includes certain components that are manufactured over a protracted length of time, which can exceed one year, before being incorporated and assembled by Fresenius Kabi AG (“Fresenius”) into the finished INTERCEPT disposable kits. The Company maintains an inventory balance based on its current sales projections, and at each reporting period, the Company evaluates whether its work-in-process inventory would be consumed for production of finished units in order to sell to existing and prospective customers within the next twelve-month period. It is not customary for the Company’s production cycle for inventory to exceed twelve months. Instead, the Company uses its best judgment to factor in lead times for the production of its finished units to meet the Company’s current demands. If actual results differ from those estimates, work-in-process inventory could potentially accumulate for periods exceeding one year. At September 30, 2013 and December 31, 2012, the Company classified its work-in-process inventory as a current asset on its condensed consolidated balance sheets based on its evaluation that the work-in-process inventory would be consumed for production and subsequently sold within each respective subsequent twelve-month period.
Inventory is recorded at the lower of cost, determined on a first-in, first-out basis, or market value. The Company uses significant judgment to analyze and determine if the composition of its inventory is obsolete, slow-moving or unsalable and frequently reviews such determinations. Generally, the Company writes-down specifically identified unusable, obsolete, slow-moving, or known unsalable inventory that has no alternative use in the period that it is first recognized by using a number of factors including product expiration dates, open and unfulfilled orders, and sales forecasts. Any write-down of its inventory to net realizable value establishes a new cost basis and will be maintained even if certain circumstances suggest that the inventory is recoverable in subsequent periods. Costs associated with the write-down of inventory are recorded in “Cost of product revenue” on the Company’s condensed consolidated statements of operations.
Property and Equipment, net
Property and equipment is comprised of furniture, equipment, information technology hardware and software and is recorded at cost. At the time the property and equipment is ready for its intended use, it is depreciated on a straight-line basis over the estimated useful lives of the assets (generally three to five years). Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful lives of the improvements.
Goodwill and Intangible Assets, net
Additions to goodwill and intangible assets, net are derived at the time of a business acquisition, in which the Company assigns the total consideration transferred to the acquired assets based on each asset’s fair value and any residual amount becomes goodwill, an indefinite life intangible asset. Intangible assets, net, which include a license for the right to commercialize the INTERCEPT Blood System in Asia, are subject to ratably amortized over the estimated useful life of ten years. The amortization of the Company’s intangible assets, net, is recorded in “Amortization of intangible assets” on the Company’s condensed consolidated statements of operations.
Goodwill is not amortized but instead is subject to an impairment test performed on an annual basis, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. The Company evaluates goodwill on an annual basis on August 31 of each fiscal year. The test for goodwill impairment is a two-step process. The first step compares the fair value of each reporting unit with its respective carrying amount, including goodwill. The Company has determined that it operates in one reporting unit and estimates the fair value of its one reporting unit using the enterprise approach under which it considers the quoted market capitalization of the Company as reported on the Nasdaq Global Market. The Company considers quoted market prices that are available in active markets to be the best evidence of fair value. The Company also considers other factors, which include future forecasted results, the economic environment and overall market conditions. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and, therefore, the second step of the impairment test is unnecessary. The second step, which is used to measure the amount of impairment loss, compares the implied fair value of each reporting unit’s goodwill with the respective carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
See Note 5 in the Notes to Condensed Consolidated Financial Statements for further information regarding the Company’s impairment analysis and the valuation of goodwill and intangible assets, net.
Long-lived Assets
The Company evaluates its long-lived assets for impairment by continually monitoring events and changes in circumstances that could indicate carrying amounts of its long-lived assets may not be recoverable. When such events or changes in circumstances occur, the Company assesses recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the expected undiscounted future cash flows are less than the carrying amount of these assets, the Company then measures the amount of the impairment loss based on the excess of the carrying amount over the fair value of the assets. The Company did not recognize impairment charges related to its long-lived assets during the three and nine months ended September 30, 2013, and 2012.
Foreign Currency Remeasurement
The functional currency of the Company’s foreign subsidiary is the United States dollar. Monetary assets and liabilities denominated in foreign currencies are remeasured in United States dollars using the exchange rates at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are remeasured in United States dollars using historical exchange rates. Revenues and expenses are remeasured using average exchange rates prevailing during the period. Remeasurements are recorded in the Company’s condensed consolidated statements of operations. The Company recorded foreign currency gains (losses) of $0.4 million and $0.2 million during the three months ended September 30, 2013, and 2012, respectively, and $0.2 million and $(0.05) during the nine months ended September 30, 2013, and 2012, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation—Stock Compensation.” Stock-based compensation expense is measured at the grant-date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period, and is adjusted for estimated forfeitures. To the extent that stock options contain performance criteria for vesting, stock-based compensation is recognized once the performance criteria are probable of being achieved.
For stock-based awards issued to non-employees, the Company follows ASC Topic 505-50, “Equity Based Payment to Non-Employees” and considers the measurement date at which the fair value of the stock-based award is measured to be the earlier of (i) the date at which a commitment for performance by the grantee to earn the equity instrument is reached or (ii) the date at which the grantee performance is complete. The Company recognizes stock-based compensation expense for the fair value of the vested portion of the non-employee stock-based awards in its condensed consolidated statements of operations.
See Note 11 in the Notes to Condensed Consolidated Financial Statements for further information regarding the Company’s stock-based compensation assumptions and expenses.
Warrant Liability
In August 2009, and November 2010, the Company issued warrants to purchase an aggregate of 2.4 million and 3.7 million shares of common stock, respectively. The material terms of the warrants were identical under each issuance except for the exercise price, date issued and expiration date. The Company classified the warrants as a liability on its condensed consolidated balance sheets as the warrants contain certain material terms which require the Company (or its successor) to purchase the warrants for cash in an amount equal to the value of the unexercised portion of the warrants (as determined in accordance with the Black-Scholes option pricing model) in connection with certain change of control transactions. In addition, the Company may also be required to pay cash to a warrant holder under certain circumstances if the Company is unable to timely deliver the shares acquired upon warrant exercise to such holder.
The fair value of these outstanding warrants is calculated using the binomial-lattice option-pricing model and is adjusted accordingly at each reporting period. The binomial-lattice option-pricing model requires that the Company uses significant assumptions and judgment to determine appropriate inputs to the model. Some of the assumptions that the Company relies on include the probability of a change of control occurring, the volatility of the Company’s stock over the life of the warrant and assumptions and inputs used to value the warrants under the Black-Scholes model should a change of control occur.
Changes resulting from the revaluation of warrants to fair value are recorded in “Revaluation of warrant liability” on the condensed consolidated statements of operations. Upon the exercise or modification to remove the provisions which require the warrants to be treated as a liability, the fair value of the warrants will be reclassified from a liability to stockholders’ equity on the Company’s condensed consolidated balance sheets and no further adjustment to the fair value would be made in subsequent periods.
See Note 10 in the Notes to Condensed Consolidated Financial Statements for further information regarding the Company’s valuation of warrant liability.
Income Taxes
The Company accounts for income taxes using an asset and liability approach in accordance with ASC Topic 740 “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. ASC Topic 740 requires derecognition of tax positions that do not have a greater than 50% likelihood of being recognized upon review by a taxing authority having full knowledge of all relevant information. Use of a valuation allowance as described in ASC Topic 740 is not an appropriate substitute for the derecognition of a tax position. The Company did not have any recorded liabilities for unrecognized tax benefits at September 30, 2013 or December 31, 2012. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its income tax expense. To date, the Company has not recognized any interest and penalties in its condensed consolidated statements of operations, nor has its accrued for or made payments for interest and penalties. The Company continues to carry a full valuation allowance on all of its deferred tax assets. Although the Company believes it more likely than not that a taxing authority would agree with its current tax positions, there can be no assurance that the tax positions the Company has taken will be substantiated by a taxing authority if reviewed. The Company’s tax years 1998 through 2012 remain subject to examination by the taxing jurisdictions.
Net Loss Per Common Share
Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per common share gives effect to all potentially dilutive common shares outstanding for the period. The potentially dilutive securities include stock options, employee stock purchase plan rights, warrants and restricted stock units, which are calculated using the treasury stock method, and convertible preferred stock, which is calculated using the if-converted method. Diluted loss per common share also gives effect to potential adjustments to the numerator for changes resulting from the revaluation of warrants to fair value for the period, even if the Company is in a net loss position if the effect would result in more dilution.
Diluted loss per common share used the same weighted average number of common shares outstanding for the three months ended September 30, 2013 and the nine months ended September 30, 2013, and 2012, as calculated for the basic loss per common share as the inclusion of any potential dilutive securities would be anti-dilutive. In addition, certain potential dilutive securities were excluded from the dilution calculation for the three months ended September 30, 2012, as their inclusion would have been anti-dilutive.
The following table sets forth the reconciliation of the numerator and denominator used in the computation of basic and diluted net loss per common share for the three and nine months ended September 30, 2013, and 2012 (in thousands, except per share amounts):
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
|
Numerator: |
||||||||||||||||
|
Net loss used for basic calculation |
$ | (20,501 | ) | $ | (3,460 | ) | $ | (37,477 | ) | $ | (14,201 | ) | ||||
|
Effect of revaluation of warrant liability |
— | (873 | ) | — | — | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Adjusted net loss used for diluted calculation |
$ | (20,501 | ) | $ | (4,333 | ) | $ | (37,477 | ) | $ | (14,201 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Denominator: |
||||||||||||||||
|
Basic weighted average number of common shares outstanding |
69,791 | 54,875 | 66,464 | 54,130 | ||||||||||||
|
Effect of dilutive potential common shares resulting from warrants |
— | 502 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Diluted weighted average number of common shares outstanding |
69,791 | 55,377 | 66,464 | 54,130 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net loss per common share: |
||||||||||||||||
|
Basic |
$ | (0.29 | ) | $ | (0.06 | ) | $ | (0.56 | ) | $ | (0.26 | ) | ||||
|
Diluted |
$ | (0.29 | ) | $ | (0.08 | ) | $ | (0.56 | ) | $ | (0.26 | ) | ||||
The table below presents common shares underlying stock options, convertible preferred stock, employee stock purchase plan rights, warrants and restricted stock units that are excluded from the calculation of the weighted average number of common shares outstanding used for the calculation of diluted net loss per common share. These are excluded from the calculation due to their anti-dilutive effect for the three and nine months ended September 30, 2013, and 2012 (shares in thousands):
|
Three Months Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
|
Anti-dilutive common shares |
16,651 | 8,704 | 16,301 | 14,813 | ||||||||||||
Guarantee and Indemnification Arrangements
The Company recognizes the fair value for guarantee and indemnification arrangements issued or modified by the Company after December 31, 2002. In addition, the Company monitors the conditions that are subject to the guarantees and indemnifications in order to identify if a loss has occurred. If the Company determines it is probable that a loss has occurred, then any such estimable loss would be recognized under those guarantees and indemnifications. Some of the agreements that the Company is a party to contain provisions that indemnify the counter party from damages and costs resulting from claims that the Company’s technology infringes the intellectual property rights of a third party or claims that the sale or use of the Company’s products have caused personal injury or other damage or loss. The Company has not received any such requests for indemnification under these provisions and has not been required to make material payments pursuant to these provisions.
The Company generally provides for a one-year warranty on certain of its INTERCEPT blood-safety products covering defects in materials and workmanship. The Company accrues costs associated with warranty obligations when claims become known and are estimable. During the year ended December 31, 2012, the Company provided for warranty obligations related to replacement costs for certain of its products that the Company identified were defective or had the potential of being defective. In connection with the warranty obligations provided for in relation to certain of its products during the year ended December 31, 2012, the Company filed a warranty claim against Fresenius, which Fresenius accepted. As a result, the Company recorded a current asset of $1.8 million on its consolidated balance sheet as of December 31, 2012 representing the full amount of the warranty claim against Fresenius as Fresenius was obliged to supply the Company with replacement products or credit notes for those defective or potentially defective products. The Company also wrote-down the value of certain unsalable inventory of $1.7 million related to these products as an offsetting warranty claim against Fresenius as of December 31, 2012. As of September 30, 2013, the Company no longer has a warranty claim against Fresenius and all unsalable inventory related to this incident has been returned to Fresenius. During the three months ended March 31, 2013, the Company identified a separate production defect related to unsold inventory. The Company’s third party manufacturer has taken responsibility for the cost of replacing such damaged goods, therefore, the Company has borne no costs associated with these defects. Prior to these incidents, there have been very few warranty costs incurred. As a result, the Company did not accrue for any potential future warranty costs at September 30, 2013. In addition, the Company believes that the defective products and those that had the potential of being defective identified during the three months ended March 31, 2013 and during the year ended December 31, 2012 are isolated.
Fair Value of Financial Instruments
The Company determines the fair value relating to its financial assets and liabilities. The carrying amounts of accounts receivables, accounts payable, and other accrued liabilities approximate their fair value due to the relative short-term maturities. Based on the borrowing rates currently available to the Company for loans with similar terms, the Company believes the fair value of its debt approximates their carrying amounts. The Company measures and records certain financial assets and liabilities at fair value on a recurring basis, including its available-for-sale securities and warrant liability. The Company classifies financial instruments within Level 1 if quote prices are available in active markets, which include its money market funds as the money market funds are actively traded in markets and their market price can be readily determined. The Company classifies instruments in Level 2 if the instruments are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. These instruments include the Company’s available-for-sale securities related to United States government agencies. The available-for-sale securities are held by a custodian who obtains investment prices from a third party pricing provider that uses standard inputs to models which vary by asset class. The Company classifies instruments in Level 3 if one or more significant inputs or significant value drivers are unobservable, which include its warrant liability. The Company assesses any transfers among fair value measurement levels at the end of each reporting period.
See Note 2 and 10 in the Notes to Condensed Consolidated Financial Statements for further information regarding the Company’s valuation on financial instruments.
New Accounting Pronouncements
In February 2013, Accounting Standards Codification Topic 220, Comprehensive Income, was amended to require additional information about amounts reclassified out of accumulated other comprehensive income. We adopted this guidance beginning January 1, 2013, and will provide the additional information when such reclassifications occur. The amendment did not have a material effect on our consolidated financial statements.
|
|||
The following table sets forth the reconciliation of the numerator and denominator used in the computation of basic and diluted net loss per common share for the three and nine months ended September 30, 2013, and 2012 (in thousands, except per share amounts):
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
|
Numerator: |
||||||||||||||||
|
Net loss used for basic calculation |
$ | (20,501 | ) | $ | (3,460 | ) | $ | (37,477 | ) | $ | (14,201 | ) | ||||
|
Effect of revaluation of warrant liability |
— | (873 | ) | — | — | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Adjusted net loss used for diluted calculation |
$ | (20,501 | ) | $ | (4,333 | ) | $ | (37,477 | ) | $ | (14,201 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Denominator: |
||||||||||||||||
|
Basic weighted average number of common shares outstanding |
69,791 | 54,875 | 66,464 | 54,130 | ||||||||||||
|
Effect of dilutive potential common shares resulting from warrants |
— | 502 | — | — | ||||||||||||
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|
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|
|
|
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Diluted weighted average number of common shares outstanding |
69,791 | 55,377 | 66,464 | 54,130 | ||||||||||||
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|
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Net loss per common share: |
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|
Basic |
$ | (0.29 | ) | $ | (0.06 | ) | $ | (0.56 | ) | $ | (0.26 | ) | ||||
|
Diluted |
$ | (0.29 | ) | $ | (0.08 | ) | $ | (0.56 | ) | $ | (0.26 | ) | ||||
The table below presents common shares underlying stock options, convertible preferred stock, employee stock purchase plan rights, warrants and restricted stock units that are excluded from the calculation of the weighted average number of common shares outstanding used for the calculation of diluted net loss per common share. These are excluded from the calculation due to their anti-dilutive effect for the three and nine months ended September 30, 2013, and 2012 (shares in thousands):
|
Three Months Ended September 30, |
Nine Months
Ended September 30, |
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| 2013 | 2012 | 2013 | 2012 | |||||||||||||
|
Anti-dilutive common shares |
16,651 | 8,704 | 16,301 | 14,813 | ||||||||||||
|
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The fair values of certain of the Company’s financial assets and liabilities were determined using the following inputs at September 30, 2013 (in thousands):
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
|
Money market funds (1) |
$ | 7,862 | $ | 7,862 | $ | — | $ | — | ||||||||
|
Corporate debt securities (2) |
24,948 | — | 24,948 | — | ||||||||||||
|
United States government agency securities (2) |
4,023 | — | 4,023 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
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|
Total financial assets |
$ | 36,833 | $ | 7,862 | $ | 28,971 | $ | — | ||||||||
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|
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|
|
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|
Warrant liability |
$ | 22,706 | $ | — | $ | — | $ | 22,706 | ||||||||
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|
|
|
|
|
|
|
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|
Total financial liabilities |
$ | 22,706 | $ | — | $ | — | $ | 22,706 | ||||||||
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|
|
|
|
|
|
|
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| (1) | Included in cash and cash equivalents on the Company’s condensed consolidated balance sheets. |
| (2) | Included in short-term investments on the Company’s condensed consolidated balance sheets. |
The fair values of certain of the Company’s financial assets and liabilities were determined using the following inputs at December 31, 2012 (in thousands):
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
|
Money market funds (1) |
$ | 10,268 | $ | 10,268 | $ | — | $ | — | ||||||||
|
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|
|
|
|
|
|
|
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|
Total financial assets |
$ | 10,268 | $ | 10,268 | $ | — | $ | — | ||||||||
|
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|
|
|
|
|
|
|
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|
Warrant liability |
$ | 5,903 | $ | — | $ | — | $ | 5,903 | ||||||||
|
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|
|
|
|
|
|
|
|||||||||
|
Total financial liabilities |
$ | 5,903 | $ | — | $ | — | $ | 5,903 | ||||||||
|
|
|
|
|
|
|
|
|
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| (1) | Included in cash and cash equivalents on the Company’s condensed consolidated balance sheets. |
A reconciliation of the beginning and ending balances for warrant liability using significant unobservable inputs (Level 3) from December 31, 2012, to September 30, 2013, was as follows (in thousands):
|
Balance at December 31, 2012 |
$ | 5,903 | ||
|
Increase in fair value of warrants |
16,803 | |||
|
Settlement of warrants exercised |
— | |||
|
|
|
|||
|
Balance at September 30, 2013 |
$ | 22,706 | ||
|
|
|
|
|||
The following is a summary of available-for-sale securities at September 30, 2013 (in thousands):
| September 30, 2013 | ||||||||||||
| Amortized Cost | Gross Unrealized Loss |
Fair Value | ||||||||||
|
Money market funds |
$ | 7,862 | $ | 7,862 | ||||||||
|
United States government agency securities |
4,027 | (4 | ) | 4,023 | ||||||||
|
Corporate debt securities |
24,977 | (29 | ) | 24,948 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Total available-for-sale securities |
$ | 36,866 | $ | (33 | ) | $ | 36,833 | |||||
|
|
|
|
|
|
|
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Available-for-sale securities at September 30, 2013 and December 31, 2012, consisted of the following by original contractual maturity (in thousands):
| September 30, 2013 | December 31, 2012 | |||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
|
Due in one year or less |
$ | 24,509 | $ | 24,492 | $ | 10,268 | $ | 10,268 | ||||||||
|
Due greater than one year and less than five years |
12,357 | 12,341 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total available-for-sale securities |
$ | 36,866 | $ | 36,833 | $ | 10,268 | $ | 10,268 | ||||||||
|
|
|
|
|
|
|
|
|
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|
|||
Inventories at September 30, 2013 and December 31, 2012, consisted of the following (in thousands):
| September 30, 2013 |
December 31, 2012 |
|||||||
|
Work-in-process |
$ | 4,810 | $ | 3,551 | ||||
|
Finished goods |
7,876 | 6,629 | ||||||
|
|
|
|
|
|||||
|
Total inventories |
$ | 12,686 | $ | 10,180 | ||||
|
|
|
|
|
|||||
|
|||
The following is a summary of intangible assets, net at September 30, 2013 (in thousands):
| September 30, 2013 | ||||||||||||
| Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||
|
Acquisition-related intangible assets: |
||||||||||||
|
Reacquired license - INTERCEPT Asia |
$ | 2,017 | $ | (622 | ) | $ | 1,395 | |||||
|
|
|
|
|
|
|
|||||||
|
Total intangible assets |
$ | 2,017 | $ | (622 | ) | $ | 1,395 | |||||
|
|
|
|
|
|
|
|||||||
The following is a summary of intangible assets, net at December 31, 2012 (in thousands):
| December 31, 2012 | ||||||||||||
| Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||
|
Acquisition-related intangible assets: |
||||||||||||
|
Reacquired license - INTERCEPT Asia |
$ | 2,017 | $ | (471 | ) | $ | 1,546 | |||||
|
|
|
|
|
|
|
|||||||
|
Total intangible assets |
$ | 2,017 | $ | (471 | ) | $ | 1,546 | |||||
|
|
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|
|
|
|
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|
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Accrued liabilities at September 30, 2013 and December 31, 2012, consisted of the following (in thousands):
| September 30, 2013 |
December 31, 2012 |
|||||||
|
Accrued compensation and related costs |
$ | 2,588 | $ | 2,692 | ||||
|
Accrued inventory costs |
5,115 | 2,352 | ||||||
|
Accrued contract and other accrued expenses |
4,357 | 2,575 | ||||||
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|
|
|
|||||
|
Total accrued liabilities |
$ | 12,060 | $ | 7,619 | ||||
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|
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|
|||
Debt at September 30, 2013, consisted of the following (in thousands):
| September 30, 2013 | ||||||||||||
| Principal | Unamortized Discount |
Total | ||||||||||
|
Comerica - Revolving Line of Credit, due 2014 |
$ | 3,638 | — | $ | 3,638 | |||||||
|
|
|
|
|
|
|
|||||||
|
Total debt |
3,638 | — | 3,638 | |||||||||
|
Less: debt - current |
(3,638 | ) | — | (3,638 | ) | |||||||
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|
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|
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|
Debt - non-current |
$ | — | — | $ | — | |||||||
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Debt at December 31, 2012, consisted of the following (in thousands):
| December 31, 2012 | ||||||||||||
| Principal | Unamortized Discount |
Total | ||||||||||
|
Comerica - Growth Capital Loan A, due 2015 |
$ | 4,583 | $ | (49 | ) | $ | 4,534 | |||||
|
Comerica - Revolving Line of Credit, due 2014 |
3,190 | — | 3,190 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total debt |
7,773 | (49 | ) | 7,724 | ||||||||
|
Less: debt - current |
(4,857 | ) | 29 | (4,828 | ) | |||||||
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|
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|
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|
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|
Debt - non-current |
$ | 2,916 | $ | (20 | ) | $ | 2,896 | |||||
|
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|
|
|
|
|
|||||||
Principal and interest payments on debt at September 30, 2013, are expected to be as follows for each of the following five years (in thousands):
|
Year ended December 31, |
||||
|
2013 (remaining three months) |
$ | 40 | ||
|
2014 (1) |
3,740 | |||
|
2015 |
— | |||
|
2016 |
— | |||
|
2017 |
— | |||
| (1) | Included outstanding revolving line of credit balance based on the Company’s obligation to repay the outstanding revolving line of credit balance at the end of the revolving line of credit term. |
|
|||
The fair value of the warrants at September 30, 2013, and December 31, 2012, consisted of the following (in thousands):
| September 30, 2013 |
December 31, 2012 |
|||||||
|
2009 Warrants |
$ | 9,203 | $ | 2,009 | ||||
|
2010 Warrants |
13,503 | 3,894 | ||||||
|
|
|
|
|
|||||
|
Total warrant liability |
$ | 22,706 | $ | 5,903 | ||||
|
|
|
|
|
|||||
The fair value of the Company’s warrants was based on using the binomial-lattice option valuation model and using the following assumptions at September 30, 2013, and December 31, 2012:
| September 30, 2013 |
December 31, 2012 |
|||||||
|
2009 Warrants: |
||||||||
|
Expected term (in years) |
0.90 | 1.65 | ||||||
|
Estimated volatility |
43 | % | 45 | % | ||||
|
Risk-free interest rate |
0.10 | % | 0.25 | % | ||||
|
Expected dividend yield |
0 | % | 0 | % | ||||
|
2010 Warrants: |
||||||||
|
Expected term (in years) |
2.11 | 2.86 | ||||||
|
Estimated volatility |
41 | % | 51 | % | ||||
|
Risk-free interest rate |
0.33 | % | 0.36 | % | ||||
|
Expected dividend yield |
0 | % | 0 | % | ||||
|
|||
Activity under the Company’s equity incentive plans related to stock options is set forth below (in thousands except per share amounts):
| Number of Options Outstanding |
Weighted Average Exercise Price per Share |
|||||||
|
Balance at December 31, 2012 |
8,504 | $ | 3.40 | |||||
|
Granted |
2,503 | 3.69 | ||||||
|
Forfeited |
(111 | ) | 3.19 | |||||
|
Expired |
(189 | ) | 6.71 | |||||
|
Exercised |
(177 | ) | 2.50 | |||||
|
|
|
|||||||
|
Balance at September 30, 2013 |
10,530 | $ | 3.43 | |||||
|
|
|
|||||||
Stock-based compensation recognized on the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2013, and 2012, was as follows (in thousands):
|
Three Months Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
|
Stock-based compensation expense by caption: |
||||||||||||||||
|
Research and development |
$ | 132 | $ | 146 | $ | 341 | $ | 423 | ||||||||
|
Selling, general and administrative |
729 | 549 | 2,074 | 1,488 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total stock-based compensation expense |
$ | 861 | $ | 695 | $ | 2,415 | $ | 1,911 | ||||||||
|
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|
|||||||||
|
|||
The Company had the following significant customers that accounted for more than 10% of the Company’s total product revenue, all of which operate in a country outside of the United States, during the three and nine months ended September 30, 2013, and 2012 (in percentages):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
|
Etablissement Francais du Sang |
20 | % | 22 | % | 18 | % | 23 | % | ||||||||
|
Movaco, S.A. |
19 | % | 19 | % | 16 | % | 19 | % | ||||||||
|
Bravo Pacific Limited |
11 | % | * | * | * | |||||||||||
|
Advanced Technology Comp. KSC |
10 | % | * | * | * | |||||||||||
|
AUM+ LTD |
* | 13 | % | * | * | |||||||||||
| * | Represents an amount less than 10% of product revenue. |
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