| Summary of Significant Accounting Policies | 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. (together with Cerus Corporation, hereinafter
“Cerus” or the “Company”) after elimination
of all intercompany accounts and transactions. These unaudited
condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States (“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 normal
recurring entries, considered necessary for a fair presentation
have been made. Operating results for the three and nine months
ended September 30, 2015, are not necessarily indicative of
the results that may be expected for the year ending
December 31, 2015, or for any future periods.
These unaudited condensed consolidated financial statements and
notes thereto should be read in conjunction with the
Company’s audited consolidated financial statements and notes
thereto for the year ended December 31, 2014, which were
included in the Company’s 2014 Annual Report on Form 10-K,
filed with the SEC on March 16, 2015. The accompanying
condensed consolidated balance sheet as of December 31, 2014,
has been derived from the Company’s audited consolidated
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.
Reclassifications
Certain reclassifications have been made to prior period reported
amounts to conform to the current period presentations. Previously
the Company had presented the amortization of premium and accretion
of any discount resulting from the purchase of fixed income
securities as a component of “Interest expense” on the
unaudited condensed consolidated statements of operations. For the
three and nine months ended September 30, 2014, the Company
has reclassified approximately $0.1 million and $0.3 million,
respectively, of the amortization of premium resulting from the
purchase of fixed income securities as a component of “Other
income, net” on the unaudited condensed consolidated
statements of operations. This reclassification had no impact on
net loss, total assets or total stockholders’ equity.
Revenue
The Company recognizes revenue in accordance with Accounting
Standards Codification (“ASC”) Topic 605-25,
“Revenue Recognition – Arrangements with Multiple
Deliverables,”
Revenue related to 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 an arrangement. The Company sells its platelet and
plasma systems directly to blood banks, hospitals, universities and
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. Because the Company has no vendor
specific objective evidence or third party evidence for its
products due to the Company’s variability in its pricing
across the regions into which it sells its products, the allocation
of revenue is based on best estimated selling price for the
products sold. The objective of best estimated selling price is to
determine the price at which the Company would transact a sale, had
the product been sold on a stand-alone basis. The Company
determines best estimated selling price for its products by
considering multiple factors, including, but not limited to,
features and functionality of the system, geographies, type of
customer, and market conditions. The Company regularly reviews best
estimated selling price, as applicable.
Freight costs charged to customers are recorded as a component of
revenue under ASC Topic 605, “Accounting for Shipping and
Handling Fees and Costs.”
Research and Development Expenses
In accordance with ASC Topic 730, “Accounting for Research
and Development Expenses,”
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.
Investments
Investments with original maturities of greater than three months,
primarily corporate debt, U.S. government agency securities and
marketable equity securities of Aduro Biotech, Inc.
(“Aduro”), are designated as available-for-sale and
classified as short-term investments, in accordance with ASC Topic
320, “ Accounting for Certain Investments in Debt and
Equity Securities
The Company also reviews 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, if any, are recorded in “Other
income, net” on the Company’s unaudited 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 unaudited condensed consolidated
balance sheets. The Company also has non-US dollar denominated
deposits recorded as “Restricted cash” in compliance
with certain foreign contractual requirements.
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 non-equity
short-term investments are maintained at 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 are investment grade and
carry high credit quality ratings, which is in accordance with its
investment policy. At September 30, 2015, the fair value of
the Company’s marketable equity securities of Aduro is
subject to the underlying volatility of Aduro’s stock price.
At September 30, 2015, 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. On a regular basis, including at the time of sale, the
Company performs credit evaluations of its significant customers
that it expects to sell to on credit terms. 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
establishes an allowance for doubtful accounts against the accounts
receivable on its unaudited condensed consolidated balance sheets
and records a charge on its unaudited condensed consolidated
statements of operations as a component of selling, general and
administrative expenses. At September 30, 2015 and
December 31, 2014, the Company had not recorded any reserves
for potentially uncollectible accounts.
The Company had two and one customer that accounted for more than
10% of the Company’s outstanding trade receivables at each of
September 30, 2015 and December 31, 2014, respectively.
These customers cumulatively represented approximately 42% and 36%
of the Company’s outstanding trade receivables at
September 30, 2015 and December 31, 2014, respectively.
To date, the Company has not experienced collection difficulties
from these customers.
Inventories
At September 30, 2015 and December 31, 2014, 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 shelf 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 before being sold to and ultimately incorporated and
assembled by Fresenius Kabi Deutschland GmbH or Fresenius, Inc.
(with their affiliates, “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 sold to Fresenius 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 work-in-process and finished
units to meet the Company’s forecasted demands. If actual
results differ from those estimates, work-in-process inventory
could potentially accumulate for periods exceeding one year. At
September 30, 2015 and December 31, 2014, the Company
classified its work-in-process inventory as a current asset on its
consolidated balance sheets based on its evaluation that the
work-in-process inventory would be sold to Fresenius for finished
disposable kit production 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. 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 revenue” on the
Company’s unaudited condensed consolidated statements of
operations. At September 30, 2015 and December 31, 2014,
the Company had $1.3 million and $0.1 million, respectively,
recorded for potential obsolete, expiring or unsalable product.
Property and Equipment, net
Property and equipment is comprised of furniture, equipment,
leasehold improvements, 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.
Capitalization of Software Costs
The Company capitalizes certain significant costs incurred in the
acquisition and development of software for internal use, including
the costs of the software, materials, and consultants during the
application development stage. Costs incurred prior to the
application development stage, costs incurred once the application
is substantially complete and ready for its intended use, and other
costs not qualifying for capitalization, including training and
maintenance costs, are charged to expense as incurred. The Company
capitalized costs for enhancement of the enterprise resource
planning software system and other internal use software of zero
and $1.8 million during the nine months ended September 30,
2015 and 2014, respectively. Capitalized software costs associated
with the enterprise resource planning system are being amortized
over the estimated useful life of five years.
Costs incurred in connection with the development of software
products for sale are accounted for in accordance with the ASC
985— Costs of Software to Be Sold, Leased or Marketed
Goodwill and Intangible Assets, net
Intangible assets, net, which include a license for the right to
commercialize the INTERCEPT Blood System in Asia, are subject to
ratable amortization 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 unaudited 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. Such impairment analysis is performed on August 31
of each fiscal year, or more frequently if indicators of impairment
exist. The test for goodwill impairment may be assessed using
qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than the carrying
amount. If the Company determines that it is more likely than not
that the fair value of a reporting unit is less than the carrying
amount, the Company must then proceed with performing the
quantitative two-step process to test goodwill for impairment;
otherwise, goodwill is not considered impaired and no further
testing is warranted. The Company may choose not to perform the
qualitative assessment to test goodwill for impairment and proceed
directly to the quantitative two-step process; however, the Company
may revert to the qualitative assessment to test goodwill for
impairment in any subsequent period. The first step of the two-step
process compares the fair value of each reporting unit with its
respective carrying amount, including goodwill. The Company has
determined that it operates in one segment and has 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 of the two-step process, 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.
The Company performs an impairment test on its intangible assets,
in accordance ASC Topic 360-10, “Property, Plant and
Equipment,”
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, 2015 and 2014.
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 unaudited condensed consolidated
statements of operations.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance
with ASC Topic 718, “Compensation – Stock
Compensation.”
For stock-based awards issued to non-employees, the Company follows
ASC Topic 505-50, “Equity Based Payment to
Non-Employees”
See Note 11 in the Notes to Unaudited 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. In August 2014, all of the
outstanding August 2009 warrants were exercised in full. The
Company classifies warrants outstanding on the reporting date as a
liability on its unaudited condensed consolidated balance sheets as
the warrants contain certain material terms which require the
Company to purchase the warrants for cash in an amount equal to the
value of the unexercised portion of the warrants 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 outstanding warrants is calculated using the
Black-Scholes model and was adjusted accordingly at the end of each
reporting period.
Changes resulting from the revaluation of warrants to fair value
are recorded in “Gain from revaluation of warrant
liability” on the unaudited 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
unaudited 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 Unaudited 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.”
Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding for the
period. Diluted net loss per 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 and warrants, which are calculated using the treasury
stock method. Diluted net loss per 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.
Certain potential dilutive securities were excluded from the
dilution calculation for the three and nine months ended
September 30, 2015 and 2014, 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 share for the three and nine months ended
September 30, 2015 and 2014 (in thousands, except per share
amounts):
Three Months
Ended Nine Months
Ended
September 30, September 30,
2015 2014 2015 2014
Numerator for Basic and Diluted:
Net loss used for basic calculation $ (15,680 ) $ (10,759 ) $ (41,112 ) $ (18,573 )
Effect of revaluation of warrant liability (1,109 ) (1,738 ) (4,698 ) (14,263 )
Adjusted net loss used for diluted calculation $ (16,789 ) $ (12,497 ) $ (45,810 ) $ (32,836 )
Denominator:
Basic weighted average number of shares outstanding 96,864 75,194 95,347 73,407
Effect of dilutive potential shares 741 909 993 2,030
Diluted weighted average number of shares outstanding 97,605 76,103 96,340 75,437
Net loss per share:
Basic $ (0.16 ) $ (0.14 ) $ (0.43 ) $ (0.25 )
Diluted $ (0.17 ) $ (0.16 ) $ (0.48 ) $ (0.44 )
The table below presents shares underlying stock options that are
excluded from the calculation of the weighted average number of
shares outstanding used for the calculation of diluted net loss per
share. These are excluded from the calculation due to their
anti-dilutive effect for the three and nine months ended
September 30, 2015 and 2014 (in thousands):
Three Months Ended
Nine Months Ended
September 30, September 30,
2015 2014 2015 2014
Weighted average number of anti-dilutive potential shares:
Stock options 7,068 12,032 6,223 11,737
Guarantee and Indemnification Arrangements
The Company recognizes the fair value for guarantee and
indemnification arrangements issued or modified by the Company. 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 are probable. The Company has
not experienced significant or systemic warranty claims nor is it
aware of any existing current warranty claims and did not carry a
warranty claim liability at September 30, 2015 and
December 31, 2014.
Fair Value of Financial Instruments
The Company applies the provisions of 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 of such instruments. Based on the borrowing rates
currently available to the Company for loans with similar terms,
the Company believes the fair value of its debt also approximates
its 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 instruments within Level 1 if
quoted prices are available in active markets for identical assets.
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. The available-for-sale securities are held by a
custodian who obtains investment prices from a third party pricing
provider that uses standard inputs (observable in the market) 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 Notes 2 and 10 in the Notes to Unaudited Condensed Consolidated
Financial Statements for further information regarding the
Company’s valuation of financial instruments.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2014-09, Revenue from Contracts
with Customers (Topic 606), Revenue from Contracts with Customers (Topic 606), Deferral of
the Effective Date
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements—Going Concern Subtopic 205-40): Disclosure of Uncertainties about an
Entity’s Ability to Continue as a Going Concern
In April 2015, the FASB issued ASU No. 2015-03,
Interest—Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs
In July 2015, the FASB issued ASU No. 2015-11, Inventory
(Topic 330), Simplifying the Measurement of Inventory |
