UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from: to
Commission File Number 0-21937
CERUS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 68-0262011 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
2550 Stanwell Drive
Concord, California 94520
(Address of principal executive offices, including Zip Code)
(925) 288-6000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
As of October 26, 2011, there were 48.1 million shares of the registrants common stock outstanding.
CERUS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
2
ITEM 1. | FINANCIAL STATEMENTS |
CERUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, 2011 (Unaudited) |
December 31, 2010 (see Note 1) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
$ | 14,761 | $ | 28,948 | ||||
Short-term investments |
457 | 1,061 | ||||||
Accounts receivable, net of allowance of $48 and $51 at September 30, 2011 and December 31, 2010, respectively |
4,783 | 4,792 | ||||||
Inventories |
9,591 | 5,957 | ||||||
Prepaid and other current assets |
1,082 | 997 | ||||||
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Total current assets |
30,674 | 41,755 | ||||||
Non-current assets: |
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Property and equipment, net |
2,045 | 2,390 | ||||||
Goodwill |
1,316 | 1,316 | ||||||
Intangible assets, net |
1,798 | 1,950 | ||||||
Restricted cash |
306 | 305 | ||||||
Other assets |
413 | 451 | ||||||
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Total assets |
$ | 36,552 | $ | 48,167 | ||||
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Liabilities and stockholders equity |
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Current liabilities: |
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Accounts payable |
$ | 3,780 | $ | 3,230 | ||||
Accrued liabilities |
5,687 | 6,003 | ||||||
Deferred revenue |
74 | 248 | ||||||
Current portion of long-term debt |
0 | 1,747 | ||||||
Current portion of capital lease obligations |
0 | 10 | ||||||
Warrant liability |
4,643 | 8,465 | ||||||
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Total current liabilities |
14,184 | 19,703 | ||||||
Non-current liabilities: |
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Long-term debt |
4,910 | 3,131 | ||||||
Long-term portion of capital lease obligations |
0 | 6 | ||||||
Other non-current liabilities |
1,290 | 1,595 | ||||||
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Total liabilities |
20,384 | 24,435 | ||||||
Commitments and contingencies |
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Stockholders equity: |
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Preferred stock |
9,496 | 9,496 | ||||||
Common stock |
48 | 47 | ||||||
Additional paid-in capital |
442,561 | 441,034 | ||||||
Accumulated other comprehensive income |
1 | 108 | ||||||
Accumulated deficit |
(435,938 | ) | (426,953 | ) | ||||
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Total stockholders equity |
$ | 16,168 | $ | 23,732 | ||||
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Total liabilities and stockholders equity |
$ | 36,552 | $ | 48,167 | ||||
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See notes to condensed consolidated financial statements.
3
CERUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(in thousands, except per share data)
Three Months Ended September 30, |
Nine Months
Ended September 30, |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue: |
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Product revenue |
$ | 7,770 | $ | 4,521 | $ | 20,706 | $ | 15,712 | ||||||||
Government grants and cooperative agreements |
1,479 | 470 | 1,915 | 936 | ||||||||||||
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Total revenue |
9,249 | 4,991 | 22,621 | 16,648 | ||||||||||||
Cost of product revenue |
4,650 | 2,324 | 12,073 | 8,416 | ||||||||||||
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Gross profit |
4,599 | 2,667 | 10,548 | 8,232 | ||||||||||||
Operating expenses: |
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Research and development |
1,814 | 1,282 | 5,616 | 3,776 | ||||||||||||
Selling, general and administrative |
5,380 | 5,089 | 17,115 | 15,664 | ||||||||||||
Amortization of intangible assets |
51 | 0 | 152 | 0 | ||||||||||||
Acquisition related costs, net |
0 | (201 | ) | 0 | 182 | |||||||||||
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Total operating expenses |
7,245 | 6,170 | 22,883 | 19,622 | ||||||||||||
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Loss from operations |
(2,646 | ) | (3,503 | ) | (12,335 | ) | (11,390 | ) | ||||||||
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Non-operating income (expense): |
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Gain (Loss) from revaluation of warrant liability |
5,439 | (721 | ) | 3,822 | (2,336 | ) | ||||||||||
Foreign exchange gain (loss) |
(39 | ) | 827 | 400 | (246 | ) | ||||||||||
Interest expense |
(394 | ) | (226 | ) | (847 | ) | (458 | ) | ||||||||
Other expense, net |
(22 | ) | (8 | ) | (25 | ) | (33 | ) | ||||||||
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Total non-operating income (expense), net |
4,984 | (128 | ) | 3,350 | (3,073 | ) | ||||||||||
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Net income (loss) |
$ | 2,338 | $ | (3,631 | ) | $ | (8,985 | ) | $ | (14,463 | ) | |||||
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Net income (loss) per common share: |
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Basic |
$ | 0.05 | $ | (0.09 | ) | $ | (0.19 | ) | $ | (0.37 | ) | |||||
Diluted |
$ | 0.05 | $ | (0.09 | ) | $ | (0.19 | ) | $ | (0.37 | ) | |||||
Weighted average common shares outstanding used for calculating net income (loss) per common share: |
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Basic |
47,710 | 39,310 | 47,600 | 39,020 | ||||||||||||
Diluted |
48,820 | 39,310 | 47,600 | 39,020 |
See notes to condensed consolidated financial statements.
4
CERUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(in thousands)
Nine Months
Ended September 30, |
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2011 | 2010 | |||||||
Operating activities |
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Net loss |
$ | (8,985 | ) | $ | (14,463 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
761 | 561 | ||||||
Stock-based compensation |
1,386 | 1,300 | ||||||
(Gain) Loss from revaluation of warrant liability |
(3,822 | ) | 2,336 | |||||
(Gain) Loss on sale of fixed assets |
(20 | ) | 143 | |||||
Gain on non-controlling equity interest |
0 | (315 | ) | |||||
Non-cash interest expense |
0 | 101 | ||||||
Changes in operating assets and liabilities, net of effects of acquired business: |
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Accounts receivable |
9 | 113 | ||||||
Inventories |
(3,634 | ) | 643 | |||||
Other assets |
(85 | ) | (149 | ) | ||||
Accounts payable |
550 | (1,347 | ) | |||||
Accrued restructuring |
0 | (113 | ) | |||||
Accrued liabilities |
(472 | ) | 1,091 | |||||
Deferred revenue |
(174 | ) | (112 | ) | ||||
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Net cash used in operating activities |
(14,486 | ) | (10,211 | ) | ||||
Investing activities |
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Purchase of furniture, equipment and leasehold improvements |
(117 | ) | (1,690 | ) | ||||
Purchase of certain other assets |
(90 | ) | (37 | ) | ||||
Sales of investments |
0 | 88 | ||||||
Maturities of investments |
497 | 1,293 | ||||||
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Net cash provided by (used in) investing activities |
290 | (346 | ) | |||||
Financing activities |
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Net proceeds from issuance of common stock due to exercise of stock options and purchase from ESPP |
142 | 356 | ||||||
Proceeds from note payable, net of discount |
4,910 | 4,855 | ||||||
Payments on capital lease obligations and notes |
(5,043 | ) | (57 | ) | ||||
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Net cash provided by financing activities |
9 | 5,154 | ||||||
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Net decrease in cash and cash equivalents |
(14,187 | ) | (5,403 | ) | ||||
Cash and cash equivalents, beginning of period |
28,948 | 17,287 | ||||||
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Cash and cash equivalents, end of period |
$ | 14,761 | $ | 11,884 | ||||
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Supplemental disclosures: |
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Common stock issued in connection with the acquisition of certain assets of BioOne |
$ | 0 | $ | 3,423 | ||||
Cash paid for interest |
$ | 835 | $ | 379 |
See notes to condensed consolidated financial statements.
5
CERUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation
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 normal recurring entries, considered necessary for a fair presentation have been made for the three and nine months ended September 30, 2011. As previously reported in the Companys 2010 Annual Report on Form 10-K in Note 18. Quarterly Financial Information in the Notes to Consolidated Financial Statements, adjustments relating to the acquisition of certain assets from BioOne Corporation (BioOne) were made to previously reported financial statements for the three and nine months ended September 30, 2010. These adjustments increased long-term assets and reduced operating expenses by $0.2 million for the three months ended September 30, 2010, and reduced long-term assets and increased operating expenses by $0.2 million for the nine months ended September 30, 2010. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011, or for any future periods.
These condensed consolidated financial statements and notes should be read in conjunction with the Companys audited financial statements and notes thereto for the year ended December 31, 2010, which were included in the Companys 2010 Annual Report on Form 10-K, filed with the SEC on March 16, 2011. The accompanying balance sheet as of December 31, 2010 has been derived from the Companys 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 the 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 probable. The Companys main sources of revenues through September 30, 2011 were product revenue from sales of the INTERCEPT Blood System for platelets and plasma (platelets 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 INTERCEPT Blood System products, the Company uses a binding purchase order and signed sales contract as evidence of written agreement. The Company sells its platelets and plasma systems directly to blood banks, hospitals, universities, government agencies, as well as to distributors in certain regions. Generally, the Companys 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 evaluates whether the delivered elements have stand-alone value to the customer. Effective January 1, 2011, the Company adopted the revised guidance in Accounting Standard Update (ASU) No. 2009-13, which was issued by the Financial Accounting Standards Board (FASB,) in October 2009 related to revenue recognition in accordance with the Accounting Standards Codification (ASC) Topic 605-25, Revenue RecognitionArrangements with Multiple Deliverables, on a prospective basis for applicable transactions originating or materially modified after December 31, 2010. Under the revised guidance, companies must assess whether or not revenue arrangements with multiple deliverables exist under the revised guidance, how the deliverables should be separated and how the consideration should be allocated to the elements. Prior to adoption of ASU No. 2009-13, consideration received was allocated to elements that were identified as discrete units of accounting based on the relative fair value method. Beginning January 1, 2011, upon the adoption of ASU No. 2009-13, 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 discernable due to the
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Companys limited history of selling its products and variability in its pricing. Since the Companys products are novel and unique and are not sold by others, third-party evidence of selling price is unavailable. The adoption of the revised guidance did not have a material impact on the Companys condensed consolidated results of operations for the three and nine months ended September 30, 2011 nor is it currently anticipated to have a material impact on future periods.
At September 30, 2011 and December 31, 2010, the Company had $0.1 million and $0.2 million, respectively, 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 is recognized as the costs on the projects are incurred. The Company receives certain United States government grants and contracts that support research in defined research projects. These grants generally provide for reimbursement of approved costs incurred as defined in the various grants.
Research and Development Expenses
The Company receives certain United States government grants that support the Companys efforts in defined research projects. These grants generally provide for reimbursement of approved costs incurred as defined in the various grants. Revenue associated with these grants is recognized as costs under each grant are incurred. In addition, accordance with ASC Topic 730, Accounting for Research and Development Expenses, research and development expenses are charged to expense when incurred. 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 Companys use of estimates in recording accrued liabilities for research and development activities (described previously in this Note under the heading Use of Estimates) 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, Cash Equivalents and Short-Term Investments
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. Investments with original maturities of greater than three months but less than one year from the date of purchase are classified as short-term investments. These investments primarily consist of marketable debt securities, which include money market instruments and United States government agency securities, and are classified as available-for-sale.
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 based on quoted market prices. 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 Companys condensed consolidated balance sheets. Realized gains and losses from the sale or maturity of available-for-sale investments are recorded in Other expense, net on the Companys 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 expense, net on the Companys condensed consolidated statements of operations.
As of September 30, 2011, the Company also maintained a certificate of deposit for approximately $0.2 million with a domestic bank. The Company holds this certificate of deposit for any potential decommissioning resulting from the Companys 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 as restricted cash on its condensed consolidated balance sheets at September 30, 2011 and December 31, 2010.
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.
7
Substantially all of the Companys cash, cash equivalents and short-term investments are maintained pursuant to the Companys investment policy at a major financial institution 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 type of investments that exist within its investment portfolio. Generally, all of the Companys remaining investments carry high credit quality ratings, which is in accordance with its investment policy. At September 30, 2011, the Company does not believe there is significant financial risk from non-performance by the issuers of the Companys cash equivalents and short-term investments.
Concentrations of credit risk with respect to trade receivables exist. However, in connection with the Companys revolving line of credit, as discussed in Note 9 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 balance sheet and records a charge on its condensed consolidated statement of operations.
The Company had recorded allowances for potentially uncollectible accounts receivable of approximately $0.1 million at both September 30, 2011 and December 31, 2010. Actual collection losses may differ from managements estimate, and such differences could have a material impact to the Companys financial position and results of operations.
The Company had three customers each accounting for more than 10% of the Companys outstanding trade receivables, which accounted for approximately 66% of outstanding trade receivables, at September 30, 2011. The Company had four customers each accounting for more than 10% of the Companys outstanding trade receivables, which accounted for approximately 63% of outstanding trade receivables at December 31, 2010. To date, the Company has not experienced collection difficulties from these customers.
Inventories
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 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 Fenwal, Inc. (Fenwal) 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. In addition, it is not customary for the Companys 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 Companys current demands. If actual results differ from those estimates, work-in-process inventory could potentially accumulate for periods exceeding one year. At September 30, 2011 and December 31, 2010, the Company classified its work-in-process inventory as a current asset on its condensed consolidated balance sheet 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 frequently reviews the composition of inventory to identify obsolete, slow-moving or otherwise unsalable items. To the extent unsalable items are observed and there is no alternative use, the Company writes-down its inventory to net realizable value in the period that it is first recognized. The 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 Companys condensed consolidated statements of operations. At September 30, 2011 and December 31, 2010, the Company had $0.2 million and $0.4 million, respectively, reserved for potential obsolete or expiring product.
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.
8
Goodwill and Intangible Assets, net
Goodwill and intangible assets, net is derived at the time of a business acquisition, in which the Company assigns the total consideration transferred to the acquired assets based on each assets fair value and any residual amount becomes goodwill, an indefinite life intangible asset. Intangible assets, net, which include the INTERCEPT Asia license, are subject to periodic amortization over the estimated useful life of ten years. The amortization of the Companys intangible assets, net, is recorded in Amortization of intangible assets on the Companys 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 they 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 by NASDAQ. 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 units goodwill with the respective carrying amount of that goodwill. If the carrying amount of the reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
See Note 6 in the Notes to condensed consolidated financial statements for further information regarding the Companys 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, 2011 and 2010.
Foreign Currency Remeasurement
The functional currency of the Companys 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 Companys condensed consolidated statements of operations. The Company recorded foreign currency gains (losses) of less than $(0.1) million and $0.8 million during the three months ended September 30, 2011 and 2010, respectively, and $0.4 million and $(0.2) million during the nine months ended September 30, 2011 and 2010, 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 1) the date at which a commitment for performance by the grantee to earn the equity instrument is reached or 2) 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 Companys stock-based compensation assumptions and expenses.
9
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 Companys 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.
Gains and losses from warrant revaluation are recorded in Gain (Loss) from revaluation of warrant liability on the condensed consolidated statements of operations. During the three and nine months ended September 30, 2011, the Company recorded non-cash gains of $5.4 million and $3.8 million, respectively, associated with changes in the fair value of the warrants from December 31, 2010. During the three and nine months ended September 30, 2010, the Company recorded non-cash charges of $0.7 million and $2.3 million, respectively, associated with changes in the fair value of the warrants from December 31, 2009. 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 Companys 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 Companys valuation of warrant liability.
Other Comprehensive Income
The components of comprehensive income (loss) include net income (loss) and other comprehensive income. The Companys only component of other comprehensive income for the three and nine months ended September 30, 2011 and 2010 consisted of unrealized gains from the Companys available-for-sales short-term investments. Other comprehensive income is reported as a separate component of stockholders equity.
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, 2011 or December 31, 2010. 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 Companys tax years 2006 through 2010 remain subject to examination by the taxing jurisdictions.
Net Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted income per share would assume conversion of all potentially dilutive securities, such as stock options, convertible preferred stock, ESPP, warrants and restricted stock units. If the Company recorded a net loss, diluted loss per share uses the same weighted average number of common shares outstanding for the period as calculated for the basic loss per share as the inclusion of any commons stock equivalents would be anti-dilutive.
10
The following table sets forth the reconciliation of the numerator and denominator used in the computation of basic and diluted net income (loss) per common share for the three and nine months ended September 30, 2011 and 2010 (in thousands, except per share amounts):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator for Basic and Diluted: |
||||||||||||||||
Net income (loss) |
$ | 2,338 | $ | (3,631 | ) | $ | (8,985 | ) | $ | (14,463 | ) | |||||
Denominator: |
||||||||||||||||
Basic weighted average number of common shares outstanding |
47,710 | 39,310 | 47,600 | 39,020 | ||||||||||||
Effect of dilutive potential common shares resulting from convertible preferred stock, stock options, restricted stock units, warrants and ESPP shares |
1,110 | 0 | 0 | 0 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Diluted weighted average number of common shares outstanding |
48,820 | 39,310 | 47,600 | 39,020 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) per common share: |
||||||||||||||||
Basic |
$ | 0.05 | $ | (0.09 | ) | $ | (0.19 | ) | $ | (0.37 | ) | |||||
Diluted |
$ | 0.05 | $ | (0.09 | ) | $ | (0.19 | ) | $ | (0.37 | ) |
The table below presents stock options, convertible preferred stock, ESPP, warrants and restricted stock units that are excluded from the diluted net income (loss) per common share due to their anti-dilutive effect for the three and nine months ended September 30, 2011 and 2010 (shares in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Weighted average of anti-dilutive common shares |
11,259 | 9,314 | 13,543 | 9,242 |
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 Companys technology infringes the intellectual property rights of a third party or claims that the sale or use of the Companys 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. There have been very few warranty costs incurred through September 30, 2011, and the company is unaware of any future warranty claims. Accordingly, at September 30, 2011 and December 31, 2010, the Company did not accrue for any potential future warranty costs.
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. Based on the borrowing rates currently available to the Company for loans with similar terms, the Company believes the fair value of long-term 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 instruments within Level 1 if quote prices are available in active markets, which include its money market funds as the maturity of money market funds are relatively short and the carrying amount is a reasonable estimate of fair value. 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 Companys available-for-sale securities related to United States government agencies and corporate debt securities. 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.
11
See Note 3 in the Notes to condensed consolidated financial statements for further information regarding the Companys valuation on financial instruments.
New Accounting Pronouncements
In May 2011, the FASB issued updated fair value measurement guidance under ASU No. 2011-14 Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, surrounding changes in the valuation premise of highest and best use of an asset, the application of premiums and discounts, and enhanced disclosure requirements. Under ASU No. 2011-14, the measurement of fair value of financial instruments will primarily be measured at the level of the unit of account whereas it was historically able to utilize the valuation premise of highest and best use of an asset, which can be applied primarily to measuring the fair value of nonfinancial assets only going forward. In addition, the application of blockage factors and other premiums and discounts in a fair value measurement will be prohibited in the valuation of all fair value levels of the hierarchy. The new disclosure requirements include, but are not limited to, further qualitative and quantitative discussions regarding level 3 fair value measurements, specifically significant unobservable inputs used, description of the valuation processes and sensitivity analysis, the disclosure of any transfers and the reasons thereof between levels 1 and 2, and the determination of assets and liabilities that are not recorded at fair value to be categorized under the fair value hierarchy. The updated fair value measurement guidance is effective for interim and annual periods beginning after December 15, 2011, which will begin for the Company on January 1, 2012. The Company does not anticipate that the additional disclosure requirements will have a material impact on the condensed consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05 Presentation of Comprehensive Income, which eliminates the presentation of other comprehensive income from the consolidated statements of stockholders equity. Instead, companies would have the option to display net income and other comprehensive income in two separate, but consecutive statements or combine net income and other comprehensive income in one continuous statement, which would be referred to the consolidated statements of comprehensive income. The new presentation requirements under this guidance are effective for interim and annual periods beginning after December 15, 2011, which will begin for the Company on January 1, 2012, and retrospective application is required for all periods presented. The Company does not anticipate that the additional disclosure requirements will have a material impact on the condensed consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08 Testing Goodwill for Impairment, which allows a company to test goodwill for impairment by first assessing the qualitative factors, which has also been updated under this guidance, to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount. If a company determines that it is more likely than not that the fair value of a reporting unit is less than the carrying amount, a 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. Under ASU No. 2011-08, the qualitative assessment is optional, such that a company has the choice to perform the goodwill impairment test under the original quantitative two-step approach only. The optional qualitative procedure for testing goodwill impairment under this guidance is effective for interim and annual periods beginning after December 15, 2011, which will begin for the Company on January 1, 2012; however, early adoption is permitted. The Company does not anticipate that the update to this accounting standard will have a material impact on the condensed consolidated financial statements.
Note 2. Acquisition
On August 24, 2010, the Company acquired certain assets of BioOne, a privately held Japanese company established to develop technologies to improve the safety of blood products in Asia. The assets included the commercialization licenses that the Company had granted to BioOne for both the platelet and plasma systems, illuminators held as saleable inventory and demonstration illuminators. No liabilities were assumed.
As consideration for the acquired BioOne assets, the Company relinquished all shares of BioOne that had been held by the Company and issued 1,172,357 shares of the Companys common stock to BioOne, of which 937,886 shares were issued at the close of the acquisition on August 24, 2010 and the remaining 234,471 shares were issued six months from the close of the acquisition date (February 25, 2011). The fair value of the Companys common stock issued to BioOne on both dates was measured based on the closing price of the Companys common stock on August 24, 2010, the date of acquisition, and was recorded as part of the total consideration.
The total value of the consideration provided was $3.7 million, of which approximately $3.4 million related to the fair value of the 1,172,357 shares of the Companys common stock issued to BioOne and approximately $0.3 million related to the fair value of the Companys non-controlling equity interest in BioOne relinquished as a result of the acquisition. The Company recognized a gain of $0.3 million, which represented the difference between the assumed fair value of the pre-acquisition non-controlling equity interest of BioOne and its carrying value. The Company carried its 13% investment in BioOne at zero as it had previously fully impaired its investment in BioOne. The assumed fair value of the pre-acquisition non-controlling equity interest was calculated by applying the Companys 13% ownership investment in BioOne to the estimated fair value of the acquired assets (excluding goodwill) of $2.4 million as noted in the table below.
12
The Company also incurred acquisition related costs of $0.5 million, which were recorded as a component in Acquisition related costs and impairment of long-term investment in related parties, net on the consolidated statements of operations during the year ended December 31, 2010.
The BioOne acquisition was accounted for as an acquisition of a business in accordance with ASC 805, Business Combinations. The Company allocated the acquired tangible and intangible assets based on their estimated fair values as of the acquisition date. The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill. The goodwill recognized is not expected to be deductible for income tax purposes. The factors that contributed to the recognition of goodwill included securing buyer-specific synergies to increase revenue and profits through the commercialization of the INTERCEPT Blood System worldwide. By acquiring these commercialization rights in certain Asian countries, the Company was able to complete the global commercialization rights for its platelets and plasma systems.
The following table summarizes the final allocation of fair value of assets acquired at the acquisition date (in thousands):
Commercialization rights - Asia |
$ | 2,017 | ||
Illuminators - Inventory |
270 | |||
Demonstration Illuminators |
135 | |||
Goodwill |
1,316 | |||
|
|
|||
Total |
$ | 3,738 | ||
|
|
The commercialization rights in Asia represent the reacquisition of contractual rights originally granted to BioOne to market the Companys products in certain countries in Asia. The contractual term of this original agreement was perpetual and the Company estimated the fair value of these acquired rights based on future expected cash flows to be generated over the expected life of the underlying technology. As a result, these intangible assets are subject to periodic amortization over the estimated useful life of ten years. The estimated fair value of inventory illuminators and demonstration illuminators was based on the expected sales price of the inventory, less reasonable profit margins.
The Companys operating results included the impact of the BioOne acquisition beginning from the acquisition date. The pro forma disclosures for historical periods have not been presented as the impact of the BioOne acquisition was not significant to the results of operations of the Company since BioOne did not have any significant revenues or expenses due to their limited operating activities as a result of a deteriorating financial situation.
Note 3. Fair Value on Financial Instruments
The fair values of certain of the Companys financial assets and liabilities were determined using the following inputs at September 30, 2011 (in thousands):
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Money market funds (1) |
$ | 6,761 | $ | 6,761 | $ | 0 | $ | 0 | ||||||||
United States government agency securities (2) |
457 | 0 | 457 | 0 | ||||||||||||
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|
|
|
|
|
|
|||||||||
Total financial assets |
$ | 7,218 | $ | 6,761 | $ | 457 | $ | 0 | ||||||||
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|
|
|||||||||
Warranty liability (3) |
$ | 4,643 | $ | 0 | $ | 0 | $ | 4,643 | ||||||||
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|
|
|
|
|
|
|||||||||
Total financial liabilities |
$ | 4,643 | $ | 0 | $ | 0 | $ | 4,643 | ||||||||
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|
|
|
|
|
|
13
The fair values of certain of the Companys financial assets were determined using the following inputs at December 31, 2010 (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) |
$ | 6,178 | $ | 6,178 | $ | 0 | $ | 0 | ||||||||
Corporate debt securities (2) |
73 | 0 | 73 | 0 | ||||||||||||
United States government agency securities (2) |
988 | 0 | 988 | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total financial assets |
$ | 7,239 | $ | 6,178 | $ | 1,061 | $ | 0 | ||||||||
|
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|
|
|
|
|
|
|||||||||
Warranty liability (3) |
$ | 8,465 | $ | 0 | $ | 0 | $ | 8,465 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total financial liabilities |
$ | 8,465 | $ | 0 | $ | 0 | $ | 8,465 | ||||||||
|
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|
|
|
|
|
|
(1) | Included in cash and cash equivalents on the Companys condensed consolidated balance sheet. |
(2) | Included in short-term investments on the Companys condensed consolidated balance sheet. |
(3) | Included in current liabilities on the Companys condensed consolidated balance sheet. |
A reconciliation of the beginning and ending balances for warrant liabilities using significant unobservable inputs (Level 3) from December 31, 2010 to September 30, 2011 was as follows (in thousands):
Balance at December 31, 2010 |
$ | 8,465 | ||
Issuance of warrants |
0 | |||
Decrease in value of warrants |
(3,822 | ) | ||
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|
|||
Balance at September 30, 2011 |
$ | 4,643 | ||
|
|
The Company did not have any transfers amongst fair value measurement levels during the nine months ended September 30, 2011.
Note 4. Cash, Cash Equivalents and Short-Term Investments
The following is a summary of cash, cash equivalents and short-term investments at September 30, 2011 (in thousands):
Carrying Value | Gross Unrealized Gain |
Fair Value | ||||||||||
Cash and cash equivalents: |
||||||||||||
Cash |
$ | 8,000 | $ | 0 | $ | 8,000 | ||||||
Money market funds |
6,761 | 0 | 6,761 | |||||||||
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|
|
|
|
|||||||
Total cash and cash equivalents |
14,761 | 0 | 14,761 | |||||||||
Short-term investments: |
||||||||||||
United States government agency securities |
456 | 1 | 457 | |||||||||
|
|
|
|
|
|
|||||||
Total short-term investments |
456 | 1 | 457 | |||||||||
|
|
|
|
|
|
|||||||
Total cash, cash equivalents and short-term investments |
$ | 15,217 | $ | 1 | $ | 15,218 | ||||||
|
|
|
|
|
|
14
The following is a summary of cash, cash equivalents and short-term investments at December 31, 2010 (in thousands):
Carrying Value | Gross Unrealized Gain |
Fair Value | ||||||||||
Cash and cash equivalents: |
||||||||||||
Cash |
$ | 22,770 | $ | 0 | $ | 22,770 | ||||||
Money market funds |
6,178 | 0 | 6,178 | |||||||||
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|
|
|
|
|||||||
Total cash and cash equivalents |
28,948 | 0 | 28,948 | |||||||||
Short-term investments: |
||||||||||||
Corporate debt securities |
14 | 59 | 73 | |||||||||
United States government agency securities |
939 | 49 | 988 | |||||||||
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|
|
|
|
|||||||
Total short-term investments |
953 | 108 | 1,061 | |||||||||
|
|
|
|
|
|
|||||||
Total cash, cash equivalents and short-term investments |
$ | 29,901 | $ | 108 | $ | 30,009 | ||||||
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|
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|
|
Cash equivalents and short-term investments consisted of the following by original contractual maturity (in thousands):
September 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Due in one year or less |
$ | 6,761 | $ | 6,761 | $ | 6,178 | $ | 6,178 | ||||||||
Due greater than three years and less than five years |
456 | 457 | 953 | 1,061 | ||||||||||||
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|
|
|
|
|
|
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Total cash equivalents and short-term investments |
$ | 7,217 | $ | 7,218 | $ | 7,131 | $ | 7,239 | ||||||||
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|
|
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 minimal during the nine months ended September 30, 2011. The Company did not record any gains from the sale or maturity of available-for-sale investments during the three months ended September 30, 2011 and during the three and nine months ended September 30, 2010. The Company did not record losses on investments experiencing an other-than-temporary decline in fair value during the three and nine months ended September 30, 2011 and 2010, 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, 2011. However, the Company recorded minimal gross realized losses from the sale or maturity of available-for-sale investments during the three and nine months ended September 30, 2010.
Note 5. Inventories
Inventories consisted of the following (in thousands):
September
30, 2011 |
December
31, 2010 |
|||||||
Work-in-process |
$ | 4,008 | $ | 2,652 | ||||
Finished goods |
5,583 | 3,305 | ||||||
|
|
|
|
|||||
Total inventories |
$ | 9,591 | $ | 5,957 | ||||
|
|
|
|
Note 6. Goodwill and Intangible Assets, net
Goodwill
During the three and nine months ended September 30, 2011, the Company did not dispose of or recognize additional goodwill. On August 31, 2011, the Company performed its annual review of goodwill. As described in Note 1 above, the Company applied the enterprise approach by reviewing the quoted market capitalization of the Company as reported by NASDAQ to calculate the fair value. In addition, the Company considered its future forecasted results, the economic environment and overall market conditions. As a result of the Companys assessment that its fair value of the reporting unit exceeded its carrying amount, the Company determined that goodwill was not impaired during the three or nine months ended September 30, 2011. Therefore, the carrying amount of goodwill was $1.3 million, which resulted from the August 2010 acquisition of certain assets from BioOne, at both September 30, 2011 and December 31, 2010.
15
Intangible Assets, net
The following is a summary of intangible assets, net at September 30, 2011 (in thousands):
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||
Acquisition-related intangible assets: |
||||||||||||
License - INTERCEPT Asia |
$ | 2,017 | $ | (219 | ) | $ | 1,798 | |||||
|
|
|
|
|
|
|||||||
Total intangible assets |
$ | 2,017 | $ | (219 | ) | $ | 1,798 | |||||
|
|
|
|
|
|
The following is a summary of intangible assets, net at December 31, 2010 (in thousands):
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||
Acquisition-related intangible assets: |
||||||||||||
License - INTERCEPT Asia |
$ | 2,017 | $ | (67 | ) | $ | 1,950 | |||||
|
|
|
|
|
|
|||||||
Total intangible assets |
$ | 2,017 | $ | (67 | ) | $ | 1,950 | |||||
|
|
|
|
|
|
The Company recognized $0.05 million and $0.2 million in amortization expense related to intangible assets for the three and nine months ended September 30, 2011, respectively. During the three and nine months ended September 30, 2011, there were no impairment charges recognized and the Company did not renew or extend the term of the acquired intangible assets.
The expected annual amortization expense of the intangible assets, net at September 30, 2011 are $0.05 million for the remaining three months of 2011, $0.2 million each subsequent year thereafter through December 31, 2019 and $0.1 million in 2020.
Note 7. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
September
30, 2011 |
December
31, 2010 |
|||||||
Accrued compensation and related |
$ | 1,589 | $ | 1,861 | ||||
Accrued inventory |
1,939 | 1,424 | ||||||
Accrued contract and other accrued expenses |
2,159 | 2,718 | ||||||
|
|
|
|
|||||
Total accrued liabilities |
$ | 5,687 | $ | 6,003 | ||||
|
|
|
|
Note 8. Commitments and Contingencies
Operating Leases
The Company generally leases its office facilities 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. These facility leases generally contain renewal options and provisions adjusting the lease payments if those renewal options are exercised. The Companys facility leases qualify as operating leases under ASC Topic 840, Leases and as such, are not included on its condensed consolidated balance sheets.
Royalties
The Company is obligated to pay royalties on certain INTERCEPT Blood System product sales based on a percentage of net sales generated. The royalty rates vary by product, with a rate of 10% of net sales for the platelet system, 3% of net sales for the plasma system, 5% of net sales for the red blood cells, or the red blood cell system, and 6.5% of net sales for UVA illuminators.
16
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 Fenwal at no cost for use in manufacturing finished disposable kits. Certain of these agreements require minimum purchase commitments from the Company.
Note 9. Long-term Note Payable
Long-term note payable at September 30, 2011 consisted of the following (in thousands):
Principal | Unamortized Discount |
Total | ||||||||||
Current portion of long-term debt |
$ | 0 | $ | 0 | $ | 0 | ||||||
Long-term debt |
5,000 | (90 | ) | 4,910 | ||||||||
|
|
|
|
|
|
|||||||
Total long-term note payable |
$ | 5,000 | $ | (90 | ) | $ | 4,910 | |||||
|
|
|
|
|
|
Long-term note payable at December 31, 2010 consisted of the following (in thousands):
Principal | Unamortized Discount |
Total | ||||||||||
Current portion of long-term debt |
$ | 1,822 | $ | (75 | ) | $ | 1,747 | |||||
Long-term debt |
3,178 | (47 | ) | 3,131 | ||||||||
|
|
|
|
|
|
|||||||
Total long-term note payable |
$ | 5,000 | $ | (122 | ) | $ | 4,878 | |||||
|
|
|
|
|
|
Principal and interest payments on the long-term note payable at September 30, 2011 are expected to be as follows for each of the following five years (in thousands):
Year ended December 31, |
||||
2011 |
53 | |||
2012 |
571 | |||
2013 |
1,835 | |||
2014 |
1,835 | |||
2015 |
1,580 |
Loan and Security Agreement
In September 2011, the Company entered into a loan and security agreement (the Credit Agreement) with Comerica Bank (Comerica). The Credit Agreement provides for a growth capital loan of up to $8.0 million (Growth Capital Loan) and a formula based revolving line of credit (RLOC) of up to $4.0 million plus any unused amounts from the Growth Capital Loan. Under the Credit Agreement, the Company is limited to an aggregate borrowing of up to $10.0 million at any time. The Company pledged all current and future assets, excluding its intellectual property and 35% of the Companys investment in its subsidiary, Cerus Europe B.V., as security for borrowings under the Credit Agreement.
Growth Capital Loan
Concurrent with the execution of the Credit Agreement, in September 2011, the Company borrowed $5.0 million of the Growth Capital Loan (Growth Capital Loan A), substantially all of which was used to repay the Companys prior debt with Oxford Finance Corporation (Oxford), as discussed in further detail below, with the remainder used for general corporate purposes. Growth Capital Loan A, which matures in 48 months, bears a fixed interest rate of 6.37%, with interestonly payments due for the first twelve months, followed by equal principal and interest payments for the remaining 36 months.
The Company may draw up to an additional $3.0 million of the Growth Capital Loan (Growth Capital Loan B) between December 31, 2011 and June 30, 2012. Growth Capital Loan B will bear a fixed interest rate based on the higher of (i) 6.25% or (ii) 6.00% plus the three month LIBOR rate at the date of draw, with interestonly payments due for the first six months followed by equal principal and interest payments for the remaining 36 months.
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 A and are being amortized as a component of interest expense using the effective interest method over the term of the Growth Capital Loan A (discount was based on an implied interest rate of 7.07%). The Company will also be required to make a final payment fee of 1% of the amounts drawn under
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Growth Capital Loan A and Growth Capital Loan B due on the earlier of (i) prepayment of the Growth Capital Loan or (ii) the maturity of the Growth Capital Loan. The final payment fee will be accreted to interest expense using the effective interest method over the life of the Growth Capital Loan A and B upon draw.
Revolving Line of Credit
The Credit Agreement also provides for a RLOC of up to $4.0 million plus any unused amounts from Growth Capital Loan B (RLOC Loan Amount). The amount available under the RLOC, which is available to the Company until September 30, 2013, is limited to the lesser of (i) 80% of eligible trade receivables or (ii) the RLOC Loan Amount. The RLOC will bear a floating rate based on the lenders prime rate plus 1.50%, with interestonly payments due each month. The Company will be required to repay the principal drawn from the RLOC at the end of the RLOC term. In September 2011, the Company incurred a commitment fee of $20,000, and will pay the same commitment fee at each annual anniversary of the RLOC. As of September 30, 2011, the Company had not drawn down any amounts under the RLOC.
Compliance with Covenants
The Company is required to maintain compliance with certain customary and routine financial covenants under the Credit Agreement. Throughout the term of the Credit Agreement, the Company is also obligated to meet certain conditions which include maintaining a minimum cash balance of $2.5 million and achieving minimum revenue levels, which will be measured monthly based on a six-month trailing basis and must be at least 75% of the pre-established future projected revenues for the six-month period. Non-compliance with the covenants could result in the principal of the note becoming due and payable. As of September 30, 2011, the Company was in compliance with the financial covenants as set forth in the Credit Agreement.
Growth Capital Facility Agreement
In March 2010, the Company entered into a growth capital facility agreement with Oxford and immediately borrowed and issued a senior secured long-term note payable for $5.0 million. The note carried a fixed interest rate of 12.04%, with interestonly payments due for the first nine months and then equal principal and interest payments for an additional 30 months. In connection with the issuance of the note, the Company paid an upfront facility fee of $0.1 million and incurred closing costs of $0.1 million, which was recorded as a discount to the note payable and was amortized as a component of interest expense using the effective interest method over the term of the note (discount was based on an implied interest rate of 13.84%). In addition, the Company agreed to pay a $0.4 million closing fee upon maturity of the note, which was being accreted to interest expense using the effective interest method over the life of the note. In September 2011, the Company repaid the outstanding balance of the long-term note payable owed to Oxford using the proceeds received from the Credit Agreement as discussed in further detail above. The Company also accelerated and expensed the remaining closing cost and fees of $0.2 million to interest expense during the three and nine months ended September 30, 2011.
Note 10. Stockholders Equity
Series B Preferred Stock
Fenwal holds 3,327 shares of the Companys Series B preferred stock. The holder of Series B preferred stock has 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 market 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 may convert each share of Series B preferred stock into 100 shares of the Companys common stock. If all shares of Series B preferred stock were converted to common stock, 332,700 shares of common stock would be issued, which represents approximately 1% of the outstanding common stock of the Company at September 30, 2011. The Company has the right to redeem the Series B preferred stock prior to conversion for a payment of $9.5 million.
Common Stock and Associated Warrant Liability
In August 2009, the Company received net proceeds of approximately $12.1 million, after deducting placement agents 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 (2009 Warrants), 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%. At September 30, 2011, the fair value of the 2009 Warrants was determined to be approximately $1.7 million using the binomial-lattice option valuation model and applying the following assumptions: (i) a risk-free rate of 0.42%, (ii) an expected term of 2.90 years, (iii) no dividend yield and (iv) a volatility of 65%.
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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%. At September 30, 2011, the fair value of the 2010 Warrants was determined to be approximately $2.9 million using the binomial-lattice option valuation model and applying the following assumptions: (i) a risk-free rate of 0.69%, (ii) an expected term of 4.12 years, (iii) no dividend yield and (iv) a volatility of 63%.
The fair value of the 2009 Warrants and 2010 Warrants was recorded on the consolidated condensed 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 expiration, 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 Companys control, could require the Company to pay cash to settle the exercise of the warrants or may require the Company to redeem the warrants.
These offerings were made pursuant to the Companys shelf registration statement on Form S-3.
For the three months ended September 30, 2011 and 2010, due to the changes in fair value of the warrants, the Company recorded gains of $5.4 million and losses of $0.7 million, respectively, on its condensed consolidated statement of operations within non-operating income (expense), net. For the nine months ended September 30, 2011 and 2010, due to the changes in fair value of the warrants, the Company recorded gains of $3.8 million and losses of $2.3 million, respectively, on its condensed consolidated statement of operations within non-operating income (expense), net. At September 30, 2011, no warrants had been exercised.
At-the-Market Agreement
In June 2011, the Company entered into an At-The-Market Issuance Sales Agreement (the Sales Agreement) with McNicoll, Lewis & Vlak LLC (MLV), which allows the Company to issue and sell shares of its common stock having an aggregate offering price of up to $20.0 million through MLV. In conjunction with the Sales Agreement, MLV will act as the Companys sales agent and will receive compensation based on an aggregate of 3% of the gross proceeds on the sale price per share of its common stock. Any sales made pursuant to the Sale Agreement are deemed an at-the-market offering and would be made pursuant to the effectiveness of the Companys shelf registration statements on Form S-3, initially filed with the SEC in October 2008 and August 2009. The Company did not place any common stock under the Sales Agreement during the three and nine months ended September 30, 2011.
Stockholder Rights Plan
In October 2009, the Companys 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 Companys 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 Companys 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 incentive plan to provide long-term incentives for employees, contractors, and members of its Board of Directors. The 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 also maintains an active employee stock purchase plan within the meaning of Section 423(b) of the Internal Revenue Code. Under the Purchase Plan, the Companys Board of Directors may authorize participation by eligible employees, including officers, in periodic offerings.
The Company has granted restricted stock units to its Senior Management. Subject to each grantees continued employment, shares underlying the grants vest in three annual installments and are issuable at the end of the three-year vesting term.
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 Companys stock price, as well as assumptions regarding a number of complex and subjective variables, which include the expected term of the grants, the Companys expected stock price volatility, actual and projected employee stock option exercise behaviors, including forfeitures, the risk-free interest rate and expected dividends.
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Total stock-based compensation recognized on the Companys condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010, was as follows (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
Stock-based compensation expense by caption: |
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Research and development |
$ | 112 | $ | 104 | $ | 332 | $ | 266 | ||||||||
Selling, general and administrative |
351 | 398 | 1,054 | 1,034 | ||||||||||||
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Total stock-based compensation expense |
$ | 463 | $ | 502 | $ | 1,386 | $ | 1,300 | ||||||||
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The Company did not record any stock-based compensation associated with the stock options exercisable for 50,000 shares of Common Stock with performance based vesting during the three and nine months ended September 30, 2011 and 2010 as the performance criteria was not probable of being achieved. These performance-based stock options remain outstanding at September 30, 2011.
Activity under the Companys equity incentive plans is set forth below (in thousands except per share amounts):
Number of Options Outstanding |
Weighted Average Exercise Price per Share |
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Balances at December 31, 2010 |
7,007 | $ | 6.42 | |||||
Granted |
1,954 | 2.30 | ||||||
Cancelled |
(1,674 | ) | 8.51 | |||||
Exercised |
(111 | ) | 0.81 | |||||
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Balances at September 30, 2011 |
7,176 | $ | 4.90 | |||||
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Note 12. Comprehensive Income (Loss)
Comprehensive income (loss) and its components for the three and nine months ended September 30, 2011, and 2010 were as follows (in thousands):
Three Months Ended September 30, |
Nine Months
Ended September 30, |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
$ | 2,338 | $ | (3,631 | ) | $ | (8,985 | ) | $ | (14,463 | ) | |||||
Other comprehensive income (loss): |
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Net unrealized gains (losses) on available-for-sale securities |
0 | (24 | ) | (107 | ) | 62 | ||||||||||
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Comprehensive income (loss) |
$ | 2,338 | $ | (3,655 | ) | $ | (9,092 | ) | $ | (14,401 | ) | |||||
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Note 13. Development and License Agreements
Agreements with Fenwal, Related Party
In December 2009, the Company and Baxter International Inc. (Baxter) entered into a settlement agreement regarding disputed amounts for certain transition services provided in 2006 by Baxter in conjunction with the transfer of commercialization rights to the Company. In consideration for agreeing to the settlement, with both parties waiving all rights and obligations, the Company agreed to pay Baxter $0.5 million, which was recorded as a payable on its December 31, 2009 consolidated balance sheet, and subsequently paid by the Company in 2010.
As a result of Baxters sale of its transfusion therapies division in 2007 to Fenwal, the Company has certain agreements with Fenwal which require the Company to pay royalties on future INTERCEPT Blood System product sales at royalty rates that vary by
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product: 10% of product sales for the platelet system, 3% of product sales for the plasma system and 5% of product sales for the red blood cell system, and 6.5% on sales of illuminators. During the three months ended September 30, 2011 and 2010, the Company made royalty payments to Fenwal of $0.6 million and $0.4 million, respectively, and $1.6 million and $1.3 million during the nine months ended September 30, 2011 and 2010, respectively. At September 30, 2011 and December 31, 2010, the Company owed royalties to Fenwal of $0.6 million and $0.5 million, respectively.
In December 2008, the Company extended its agreement with Fenwal to manufacture finished disposable kits for the platelet and plasma systems through December 31, 2013. Under the amended manufacturing agreement, the Company pays Fenwal 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 Fenwal of $2.1 million and $2.2 million relating to the manufacturing of the Company products during the three months ended September 30, 2011, and 2010, respectively, and $8.5 million and $6.7 million during the nine months ended September 30, 2011 and 2010, respectively. At both September 30, 2011 and December 31, 2010, the Company owed Fenwal $2.3 million for INTERCEPT disposable kits manufactured.
Cooperative Agreements with the United States Armed Forces
Since February 2001, the Company has received awards under cooperative agreements with the Army Medical Research Acquisition Activity division of the Department of Defense. The Company received these awards in order to develop its pathogen inactivation technologies for the improved safety and availability of blood that may be used by the United States Armed Forces for medical transfusions. Under the conditions of the agreements, the Company is conducting research on the inactivation of infectious pathogens in blood, including unusual viruses, bacteria and parasites that are of concern to the United States Armed Forces. This funding supports advanced development of the Companys red blood cell system. The Company recognized $1.5 million and $0.5 million of revenue under these agreements during the three months ended September 30, 2011, and 2010, respectively, and $1.9 million and $0.9 million for the nine months ended September 30, 2011 and 2010, respectively.
Note 14. Segment, Customer and Geographic Information
At September 30, 2011 and 2010, the Company operated in only one segment, blood safety. The Companys 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 are minimal.
During the three and nine months ended September 30, 2011 and 2010, the Company had the following significant customers, all of which operate in a country outside of the United States, listed as a percentage of product revenue:
Three
Months Ended September 30, |
Nine
Months Ended September 30, |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
Movaco, S.A. |
24 | % | 22 | % | 26 | % | 20 | % | ||||||||
Etablissement Francais du Sang |
20 | % | 23 | % | 20 | % | 22 | % | ||||||||
Delrus Inc. |
12 | % | 13 | % | * | 15 | % | |||||||||
Service Francophone du Sang |
* | 11 | % | * | 12 | % |
* | Represents an amount less than 10% of product revenue. |
During the three months ended September 30, 2011 and 2010, the Company also recognized government grants and cooperative agreements revenue which represented 16% of total revenue and 9% of total revenue, respectively. During the nine months ended September 30, 2011 and 2010, the Company recognized government grants and cooperative agreements revenue which represented 8% of total revenue and 6% of total revenue, respectively.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes included in this report and the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of results that may occur in future periods.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, that involve risks and uncertainties. The forward-looking statements are contained principally in Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations and in Item 1A, Risk Factors. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements about our estimates regarding the sufficiency of our cash resources, our ability to commercialize and achieve market acceptance of the INTERCEPT Blood System, the anticipated progress of our research, development and clinical programs, our ability to manage cost increases associated with pre-clinical and clinical development for the INTERCEPT Blood System, our ability to obtain and maintain regulatory approvals of the INTERCEPT Blood System, the ability of our products to inactivate pathogens that may emerge in the future, and our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others. In some cases, you can identify forward-looking statements by terms such as anticipate, will, believe, estimate, expect, plan, and similar expressions intended to identify such forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties. There can be no assurance that these statements will prove to be correct. Certain important factors could cause actual results to differ materially from those discussed in such statements, including our need for additional financing, whether our preclinical and clinical data or data from commercial use will be considered sufficient by regulatory authorities to grant marketing approval for our products, market acceptance of our products, reimbursement, development and testing of additional configurations of our products, regulation by domestic and foreign regulatory authorities, our limited experience in sales, marketing and regulatory support for the INTERCEPT Blood System, our reliance on Fenwal and third parties to manufacture certain components of the INTERCEPT Blood System, incompatibility of our platelet system with some commercial platelet collection methods, our need to complete certain of our product components commercial design, more effective product offerings by, or clinical setbacks of, our competitors, product liability, our use of hazardous materials in the development of our products, business interruption due to earthquake, our limited operating history and expectation of continuing losses, protection of our intellectual property rights, volatility in our stock price, legal proceedings, on-going compliance with the requirements of the Sarbanes-Oxley Act of 2002 and other factors discussed below and under the caption Risk Factors, in Item 1A of this Quarterly Report on Form 10-Q and in our other documents filed with the Securities and Exchange Commission. We discuss many of these risks in this Quarterly Report on Form 10-Q in greater detail in the section entitled Risk Factors under Part II, Item 1A below. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q and the documents that we incorporate by reference in and have filed as exhibits to this Quarterly Report on Form 10-Q, completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
Overview
Since our inception in 1991, we have devoted substantially all of our efforts and resources to the research, development, clinical testing and commercialization of the INTERCEPT Blood Systems and, from 2001 until late 2007, immunotherapies for cancer and infectious disease. The INTERCEPT Blood System is designed for three blood components. The INTERCEPT Blood System for platelets, or platelet system, and our INTERCEPT Blood System for plasma, or plasma system, have received CE marks and are being marketed and sold in a number of countries in Europe, The Commonwealth of Independent States, or CIS, and the Middle East and selected countries in other regions around the world. In addition, we are developing and plan to perform the required clinical trials for our INTERCEPT Blood System for red blood cells, or red blood cell system, in Europe. Subject to the availability of adequate funding from partners, government grants and/or capital markets, we intend to complete development activities for the red blood cell system necessary for regulatory approval in Europe and we may seek regulatory approval of our products in the United States.
Our near-term capital requirements are dependent on various factors, including operating costs and working capital investments associated with commercializing the INTERCEPT Blood System, costs associated with pursuing regulatory approval in geographies where we do not currently sell our platelet and plasma systems, costs associated with planning and conducting studies and clinical development of our red blood cell system, timing and magnitude of payments under grants from the United States government, and
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costs related to creating, maintaining and defending our intellectual property. Our long-term capital requirements will also be dependent on competitive developments and regulatory factors. We believe that cash received from product sales and government grants, our available cash balances, and access to debt will be sufficient to meet our capital requirements for at least the next twelve months. If our assumptions prove to be incorrect, we could consume our available capital resources sooner than we currently expect.
We may borrow additional capital from institutional and commercial banking sources to fund future growth outside of the Credit Agreement, as described below, on terms that may include restrictive covenants, which may comprise of covenants that restrict the operation of our business, liens on assets, high effective interest rates and repayment provisions that reduce cash resources and limit future access to capital markets. To the extent that we raise additional capital by issuing equity securities, including common stock issued pursuant to the Sales Agreement, as described below, our stockholders may experience substantial dilution. To the extent that we raise additional funds through collaboration or partnering arrangements, we may be required to relinquish some of our rights to our technologies or rights to market and sell our products in certain geographies, or grant licenses on terms that are not favorable to us. If we are unable to raise additional capital due to disruptions to the global credit and financial markets and general economic uncertainty or other factors, we may need to curtail planned development or commercialization activities.
We recognize product revenues from the sale of our platelet and plasma systems in Europe, the CIS countries, the Middle East, and certain other countries around the world. Our product revenues increased by $3.2 million during the three months ended September 30, 2011 compared to the three months ended September 30, 2010 primarily as a result of an increase in volume sales to existing customers and sales to new customers due to increased market penetration and customer adoption of the INTERCEPT Blood System in Europe, the CIS countries, and the Middle East. Although our revenues have grown over time, if we are unable to gain widespread commercial adoption in markets where our blood safety products are approved for commercialization, we anticipate that we may have difficulties achieving profitability. As such, we may never achieve a profitable level of operations in the future as we must conduct significant research, development, preclinical and clinical evaluation, commercialization and regulatory compliance activities for our product candidates, which, together with anticipated selling, general and administrative expenses, are expected to result in substantial losses.
In addition to the product revenues from sales of our platelet and plasma systems, we recognize revenue from government grants and cooperative agreements. Historically, we have received significant awards in funding under cooperative agreements with the United States Department of Defense, or DoD, for the INTERCEPT Blood System. Any such funding is subject to the authorization of funds and approval of our research plans by various organizations within the federal government, including the United States Congress. In August 2011, we were awarded a $2.1 million grant from the DoD to support the development of our red blood cell system. We will recognize revenue associated with this award as qualified costs are incurred for reimbursement over the performance period of one year from the date of issuance. While we expect to continue to occasionally receive grants from the DoD, we cannot assure you that further funding will be awarded to us in the future under federal grants and cooperative agreements for the INTERCEPT Blood System. The general economic environment, coupled with tight federal budgets, has led to a general decline in the amount available for government funding. If we are unable to obtain further funding for federal grants and cooperative agreements for the continued development of the INTERCEPT Blood System in the United States at levels similar to past funding, we may need to reduce our operating expenses, which would delay progress in some of our development programs.
In 2007, we spun-off our immunotherapy business, and in 2009 entered into agreements to license the immunotherapy technologies to Aduro BioTech, or Aduro. In connection with those agreements, we received and currently hold preferred shares representing less than 10% of Aduros capital. Pursuant to these license agreements, we will obtain a 1% royalty fee on any future sales resulting from certain technology. Because Aduros technology and efforts are in the very early stage of research and development, we have no basis to assign value to the equity we have received in Aduro or to determine that such equity will have any monetary value at such time we are allowed to sell it or that we will receive any royalties in the future from Aduro.
We pay royalties to Fenwal Inc., or Fenwal, on future INTERCEPT Blood System product sales under certain agreements which arose from the sale of Baxter International Inc.s, or Baxters, transfusion therapies division in 2007 to Fenwal, at rates of 10% of net sales for our platelet system, 3% of net sales for our plasma system, 5% of net sales for our red blood cell system, and 6.5% on net sales of illumination devices, or illuminators. We also pay Fenwal certain costs associated with the amended manufacturing and supply agreement we executed with Fenwal in December 2008 for the manufacture of INTERCEPT finished disposable kits for our platelet and plasma systems through December 31, 2013. Under the amended manufacturing and supply agreement, we pay Fenwal a set price per disposable kit, which is established annually, plus a fixed surcharge per disposable kit. In addition, volume driven manufacturing overhead will be paid or refunded if actual manufacturing volumes are higher or lower than the annually estimated production volumes. We are also obligated to provide certain disposable kit components at no cost to Fenwal under the amended manufacturing and supply agreement. This required us to enter into manufacturing and supply arrangements with certain other manufacturers for those components, some of which contain minimum purchase commitments. As a result, our supply chain for certain of these components, held as work-in-process on our condensed consolidated balance sheets, may potentially take over one year to complete production before being utilized in finished disposable kits.
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In August 2010, we completed an acquisition of certain assets of BioOne Corporation, or BioOne, including the commercialization rights that both Baxter (later Fenwal) and we granted to BioOne for both the platelet and plasma systems. Concurrent with the acquisition, Fenwal and we terminated such commercialization rights. As a consequence of the termination, and pursuant to a pre-existing agreement with Fenwal, our commercialization rights to the platelet and plasma systems under our 2005 and 2006 agreements with Baxter became worldwide. As consideration for the acquired BioOne assets for $3.7 million, at the close of the acquisition, we relinquished all shares we held in BioOne valued at approximately $0.3 million and issued 1,172,357 shares of our common stock to BioOne valued at approximately $3.4 million, of which 937,886 shares were issued at the close of the acquisition on August 24, 2010 and the remaining 234,471 shares were issued six months from the close of the acquisition date on February 25, 2011. Accordingly, at the acquisition date, we recorded the fair value of the assets acquired, consisting of commercialization rights in Asia of $2.0 million and illuminators of $0.4 million, with the excess of the purchase price over the fair value of the asset acquired was recorded as goodwill of $1.3 million. The recognition of goodwill was attributable to the buyer-specific value derived by us as a result of acquiring the commercialization rights in certain Asian countries in order to complete the global commercialization rights for our platelets and plasma systems.
In June 2011, we entered into an At-The-Market Issuance Sales Agreement, or Sales Agreement, with McNicoll, Lewis & Vlak LLC, or MLV, pursuant to which we may, but are not required to, issue and sell shares of our common stock having an aggregate offering price of up to $20.0 million from time to time through MLV as our sales agent. We did not place any common stock under the Sales Agreement during the three and nine months ended September 30, 2011.
In September 2011, we entered into a loan and security agreement, or Credit Agreement, with Comerica Bank, or Comerica, which provides for a growth capital loan of up to $8.0 million, or Growth Capital Loan, and a formula based revolving line of credit of up to $4.0 million plus any unused amounts from the Growth Capital Loan. Under the Credit Agreement, we are limited to an aggregate borrowing of up to $10.0 million at any time. We pledged all current and future assets, excluding our intellectual property and 35% of our investment in our subsidiary, Cerus Europe B.V., as security for borrowings under the Credit Agreement. We are also required to maintain compliance with certain customary and routine financial covenants. Throughout the term of the Credit Agreement, we are obligated to meet certain conditions which include maintaining a minimum cash balance and achieving certain minimum revenue levels. As of September 30, 2011, we borrowed $5.0 million of the Growth Capital Loan, substantially all of which was used to repay our prior debt with Oxford Finance Corporation, or Oxford, with the remainder used for general corporate purposes.
Critical Accounting Policies and Management Estimates
The preparation of financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, inventory valuation, accrued liabilities, valuation and impairment of purchased intangibles and goodwill, non-cash stock compensation assumptions, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions.
We believe the following critical accounting policies require us to make significant judgments and estimates used in the preparation of our financial statements:
Revenue We recognize revenue in accordance with the 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 probable.
Revenue related to product sales is generally recognized when we fulfill our obligations for each element of an agreement. For all sales of our INTERCEPT Blood System products, we use a binding purchase order and signed sales contract as evidence of a written agreement. We sell INTERCEPT Blood System for platelets and plasma directly to blood banks, hospitals, universities, government agencies, as well as to distributors in certain regions. Generally, our contracts with 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, we evaluate whether the delivered elements have stand-alone value to the customer. Prior to adoption of ASU No. 2009-13, consideration received was allocated to elements that were identified as discrete units of accounting based on the relative fair value method. Beginning January 1, 2011, consideration received is allocated to elements that are identified as discrete units of accounting based on the best estimated selling price. We have determined that vendor specific objective evidence is not discernable due to our limited history of selling our products and variability in our pricing. Since our products are novel and unique and are not sold by others, third-party evidence of selling price is unavailable. Freight costs charged to customers are recorded as a
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component of revenue under ASC Topic 605, Accounting for Shipping and Handling Fees and Costs and value-added-taxes, or VAT, that we invoice to our customers and remit 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 is recognized as the costs on the projects are incurred. We receive certain United States government grants and contracts that support research in defined research projects. These grants generally provide for reimbursement of approved costs incurred as defined in the various grants.
Inventory We own certain components of INTERCEPT disposable kits in the form of work-in-process inventory and finished goods, UVA illuminators, and certain replacement parts for our illuminators. Our supply chain for certain of these components, held as work-in-process on our condensed consolidated balance sheet, can potentially take over one year to complete production before being utilized in finished disposable kits. We maintain an inventory balance based on our current sales projections, and at each reporting period, we evaluate whether our 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. In addition, it is not customary for our production cycle for inventory to exceed twelve months. Instead, we use our best judgment to factor in lead times for the production of our finished units to meet our current demands. If actual results differ from those estimates, work-in-process inventory could potentially accumulate for periods exceeding one year.
Under our manufacturing and supply agreement with Fenwal, our carrying value of INTERCEPT disposable kits is dependent on an annually set price. In addition, at the end of each year, volume driven manufacturing overhead is either paid or refunded by or to us if manufacturing volumes are higher or lower than the anticipated manufacturing volumes at the time the price is established. As a result, manufacturing overhead can fluctuate and requires us to use judgment in accruing the manufacturing overhead. In addition, we use judgment in determining whether the manufacturing overhead is a cost of our inventory and recoverable when product is sold. We use significant judgment and evaluate manufacturing variances incurred during periods of abnormally low production by considering a variety of factors including the reasons for low production volumes, anticipated future production levels that correlate to and offset volumes experienced during abnormally low production cycles and contractual requirements. We record manufacturing variances incurred during periods without production as a component of Cost of product revenue on our condensed consolidated statements of operations.
Inventory is recorded at the lower of cost, determined on a first in, first-out basis, or market value. Our platelet and plasma system disposable kits generally have a two-year shelf life from the date of manufacture. Illuminators and replacement parts do not have regulated expiration dates. We use significant judgment to analyze and determine if the composition of our inventory is obsolete, slow-moving, or unsalable and frequently review such determinations. Our limited history selling the INTERCEPT Blood System limits the amount of historical data we have to perform this analysis. Generally, we write-down specifically identified obsolete, slow-moving, or known unsalable inventory that has no alternative use to net realizable value 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. The write-down of our 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 our condensed consolidated statements of operations.
Accrued expenses We record accrued liabilities for expenses related to certain contract research activities and development services, including those related to clinical trials, preclinical safety studies and external laboratory studies, as well as development activities being performed by third parties. Some of those accrued liabilities are based on estimates because billings for these activities may not occur on a timely basis consistent with the performance of the services. Specifically, accruals for clinical trials require us to make estimates surrounding costs associated with patients at various stages of the clinical trial, pass through costs to clinical sites, contract research organization costs including fees, database development, and reporting costs, among others.
Goodwill and Intangible assets In August 2010, we acquired certain assets from BioOne. We accounted for the acquisition as a business combination in accordance with ASC Topic 805, Business Combinations. In connection with the acquisition, we used significant judgment, including, but not limited to, judgments as to cash flows, discount rates, and economic lives, in identifying the assets acquired and in determining the fair values to record the purchased assets on our condensed consolidated balance sheet. In addition, under ASC Topic 805, we were required to assess the fair value of the non-controlling interest that we held in BioOne prior to the acquisition. We determined that a considerable amount of the purchase consideration was goodwill, which represents value unique to Cerus as the holder of worldwide rights to the INTERCEPT Blood System. We may be unable to realize the recorded value of the acquired assets and our assumptions may prove to be incorrect, which may require us to write-down or impair the value of the assets if and when facts and circumstances indicate a need to do so. We will perform an impairment test on our goodwill annually on August 31 of each fiscal year or more frequently if indicators of impairment exist. The test for goodwill impairment is a two-step process. The first step compares the fair value of each reporting unit with the respective carrying amount, including goodwill. We have determined that we operate in one reporting unit and estimate the fair value of our one reporting unit using the enterprise
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approach under which we consider our quoted market capitalization as reported by NASDAQ. We consider quoted market prices that are available in active markets to be the best evidence of fair value. We also consider other factors, which include future forecasted results, the economic environment and overall market conditions. If the fair value of the reporting unit exceeds the 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 units goodwill with the respective carrying amount of that goodwill. If the carrying amount of the reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. On August 31, 2011, we performed our annual review of goodwill as described above and determined that goodwill was not impaired during the three or nine months ended September 30, 2011. We will perform an impairment test on our intangible assets by continually monitoring events and changes in circumstances that could indicate carrying amounts of our intangible assets may not be recoverable. When such events or changes in circumstances occur, we assess 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, we then measure the amount of the impairment loss based on the excess of the carrying amount over the fair value of the assets. No events or changes in circumstances arose during the three or nine months ended September 30, 2011 which would require us to test the recoverability of our intangible assets.
Warrants In August 2009 and November 2010, we issued warrants to purchase 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. We classified the warrants as a liability on our condensed consolidated balance sheets as the warrants contain certain material terms which require us (or our 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, we may also be required to pay cash to a warrant holder under certain circumstances if we are 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 we use significant assumptions and judgment to determine appropriate inputs to the model. Some of the assumptions that we rely on include the probability of a change of control occurring, the volatility of our 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.
Gains and losses from warrant revaluation are recorded in Gain (Loss) from 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 our condensed consolidated balance sheets and no further adjustment to the fair value would be made in subsequent periods.
Stock-based compensation We issue stock-based awards to our employees, contractors and members of our Board of Directors, as strategic, long-term incentives. We also maintain an active employee stock purchase plan within the meaning of Section 423(b) of the Internal Revenue Code. We record stock-based compensation expense for employee awards in accordance with ASC Topic 718, Compensation Stock Compensation. We use the Black-Scholes option pricing model to determine the grant-date fair value of stock-based awards. The Black-Scholes option pricing model requires that we use assumptions regarding a number of complex and subjective variables to determine appropriate inputs to the model, which include the expected term of the grants, our expected stock price volatility, actual and projected employee stock option exercise behaviors, including forfeitures, the risk-free interest rate and expected dividends. The grant-date fair value of stock-based awards is then recognized 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. 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. We continue to apply the provisions of ASC Topic 505-50, Equity Based Payment to Non-Employees for our stock-based awards issued to non-employees. Under the provisions, 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 grantees performance is complete. We recognize stock-based compensation expense for the fair value of the vested portion of the non-employee awards in our condensed consolidated statements of operations.
Income taxes Since our inception, we have accumulated significant net operating losses and research and development credits that may be used in future periods to offset future taxable income. We currently estimate that we may not be able to utilize all of our deferred tax assets. In addition, we may not generate future taxable income prior to the expiration of our net operating loss carry forwards and research and development credits. Timing and significance of any estimated future taxable income is highly subjective and is beyond the control of management due to uncertainties in market conditions, economic environments in which we operate, and timing of regulatory approval of our products. We do not recognize tax positions that have a lower than 50% likelihood of being recognized upon review by a taxing authority having full knowledge of all relevant information. Use of a valuation allowance is not
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an appropriate substitute for the derecognition of a tax position. We did not have any recorded liabilities for unrecognized tax benefits at September 30, 2011 or December 31, 2010. We recognize accrued interest and penalties related to unrecognized tax benefits in our income tax expense. To date, we have not recognized any interest and penalties in our condensed consolidated statements of operations, nor have we accrued for or made payments for interest and penalties. We continue to carry a full valuation allowance on all of our deferred tax assets. Although we believe it more likely than not that a taxing authority would agree with our current tax positions, there can be no assurance that the tax positions we have taken will be substantiated by a taxing authority if reviewed. Our tax years 2006 through 2010 remain subject to examination by the taxing jurisdictions.
Results of Operations
Three and Nine Months Ended September 30, 2011 and 2010
Revenue
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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(in thousands, except percentages) | 2011 | 2010 | Change | 2011 | 2010 | Change | ||||||||||||||||||||||||||
Product revenue |
$ | 7,770 | $ | 4,521 | $ | 3,249 | 72 | % | $ | 20,706 | $ | 15,712 | $ | 4,994 | 32 | % | ||||||||||||||||
Government grants and cooperative agreements |
1,479 | 470 | $ | 1,009 | 215 | % | 1,915 | 936 | 979 | 105 | % | |||||||||||||||||||||
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Total revenue |
$ | 9,249 | $ | 4,991 | $ | 4,258 | 85 | % | $ | 22,621 | $ | 16,648 | $ | 5,973 | 36 | % | ||||||||||||||||
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Product revenue increased by $3.2 million and $5.0 million for the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010, respectively, primarily as a result of an increase in sales volume of our disposable platelet and plasma system kits sold to existing customers due to increased market penetration and customer adoption of the INTERCEPT Blood System in Europe, the CIS countries, and the Middle East, which was partially offset by a decline in the sales volume of our illuminators. We expect that product revenues for both our platelet and plasma systems will continue to increase in future periods as the INTERCEPT Blood System gains market acceptance in geographies where commercialization efforts are underway. These quarterly results may not be indicative of INTERCEPT Blood System revenue in the future.
Revenue from government grants and cooperative agreements increased by $1.0 million for both the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010, respectively. This increase was partly attributable to higher reimbursable development efforts related to our red blood cell system during the three and nine months ended September 30, 2011 compared to the corresponding periods of 2010. In addition, in August 2011, we were awarded a new grant by the DoD totaling $2.1 million.
Cost of Product Revenue
Our cost of product revenue consists of the cost of the INTERCEPT Blood System inventory sold, royalties payable to Fenwal for product sales, provisions for obsolete, slow-moving and unsaleable product, certain order fulfillment costs and to the extent applicable, costs for idle facilities. Inventory is accounted for on a first-in, first-out basis.
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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(in thousands, except percentages) | 2011 | 2010 | Change | 2011 | 2010 | Change | ||||||||||||||||||||||||||
Cost of product revenue |
$ | 4,650 | $ | 2,324 | $ | 2,326 | 100 | % | $ | 12,073 | $ | 8,416 | $ | 3,657 | 43 | % |
Cost of product revenue increased by $2.3 million and $3.7 million for the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010, respectively, primarily due to a higher number of disposable kits sold. During the three and nine months ended September 30, 2011, we incurred period costs of $0.5 million related to fees associated with contractual minimum purchases with certain of our suppliers.
Our realized gross margins on product sales were 40% during the three months ended September 30, 2011 down from 49% during the three months ended September 30, 2010. For the nine months ended September 30, 2011, our realized gross margins on product sales were 42%, down from 46% for the nine months ended September 30, 2010. Changes in our gross margins are affected by various factors, including manufacturing and supply chain costs, the mix of product sold and the mix of customers to which product is sold. During the three months ended September 30, 2011, we incurred certain supplier costs associated with our inventory manufacturer. These costs impacted gross margins on product sales by 7% and 2% for the three and nine months ended September 30, 2011 compared to the corresponding periods in 2010, respectively. Generally, we offer our distributors tiered volume discounts of varying magnitudes, depending on their purchase commitments, which, depending on sales volumes to those distributors receiving tiered volume discounts, may impact our gross margins.
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Research and Development Expenses
Our research and development expenses include salaries and related expenses for our scientific personnel, non-cash stock-based compensation, payments to consultants, costs to prepare and conduct preclinical and clinical trials, third-party costs for development activities, certain regulatory costs, costs for licensed technologies, costs associated with our infrastructure, and laboratory chemicals and supplies.
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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(in thousands, except percentages) | 2011 | 2010 | Change | 2011 | 2010 | Change | ||||||||||||||||||||||||||
Research and development |
$ | 1,814 | $ | 1,282 | $ | 532 | 41 | % | $ | 5,616 | $ | 3,776 | $ | 1,840 | 49 | % |
Research and development expenses increased by $0.5 million and $1.8 million for the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010, respectively, primarily due to increased costs related to our efforts to further advance the development of our red blood cell system program. Of the total research and development costs incurred, non-cash stock-based compensation represented $0.1 million for both the three months ended September 30, 2011 and 2010 and $0.3 million for both the nine months ended September 30, 2011 and 2010.
We anticipate our research and development spending will continue to increase over the near term to further our red blood cell system development efforts or pursue regulatory approval for our products in the United States. Due to the inherent uncertainties and risks associated with developing biomedical products, including, but not limited to, intense and changing government regulation, uncertainty of future pre-clinical and clinical trial results and uncertainty associated with manufacturing, it is not possible to reasonably estimate the costs to complete these research and development projects. We face numerous risks and uncertainties associated with the successful completion of our research and development projects; see Risk Factors in Part II, Item 1A below.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses include salaries and related expenses for administrative personnel, non-cash stock-based compensation, expenses for our commercialization efforts in Europe, expenses for accounting, tax, and internal control, legal and facility related expenses, and insurance premiums.
Three Months
Ended September 30, |
Nine Months Ended September 30, |
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(in thousands, except percentages) | 2011 | 2010 | Change | 2011 | 2010 | Change | ||||||||||||||||||||||||||
Selling, general and administrative |
$ | 5,380 | $ | 5,089 | $ | 291 | 6 | % | $ | 17,115 | $ | 15,664 | $ | 1,451 | 9 | % |
Selling, general, and administrative expenses increased by $0.3 million and $1.5 million for the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010, respectively, primarily due to increased spending related to the expansion of our marketing efforts in Europe. Of these amounts, non-cash stock-based compensation represented $0.4 million for both the three months ended September 30, 2011 and 2010 and $1.1 million and $1.0 million for the nine months ended September 30, 2011 and 2010, respectively.
We anticipate that we will be focused on maintaining our selling, general, and administrative spending around the current levels over the coming year, as part of a larger effort to focus our resources, contain operating expenses and conserve cash.
Amortization of Intangible Assets
Amortization of intangible assets relates to a license to commercialize the INTERCEPT Blood System in certain Asian countries in connection with our acquisition of certain assets from BioOne. The BioOne transaction was accounted for as a business combination under ASC Topic 805, Business Combination, which assigned a fair value of $2.0 million to the intangible assets in August 2010. These intangible assets are being amortized over an estimated useful life of ten years and will be reviewed for impairment as facts and circumstances arise.
Three Months
Ended September 30, |
Nine Months Ended September 30, |
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(in thousands, except percentages) | 2011 | 2010 | Change | 2011 | 2010 | Change | ||||||||||||||||||||||||||
Amortization of intangible assets |
$ | 51 | $ | 0 | $ | 51 | 100 | % | $ | 152 | $ | 0 | $ | 152 | 100 | % |
Amortization of intangible assets increased by $0.05 million and $0.2 million for the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010, respectively, as the acquisition of purchased intangible assets related to our license to commercialize the INTERCEPT Blood System in certain Asian countries occurred during the second half of 2010.
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Acquisition Related Costs, net
Acquisition related costs, net represented transaction costs associated with our acquisition of certain assets of BioOne in 2010. These transaction costs included, but were not limited to, legal fees, transfer agent fees, accounting fees, and consulting fees directly attributable to the business combination.
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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(in thousands, except percentages) | 2011 | 2010 | Change | 2011 | 2010 | Change | ||||||||||||||||||||||||||
Acquisition related costs, net |
$ | 0 | $ | (201 | ) | $ | 201 | (100 | )% | $ | 0 | $ | 182 | $ | (182 | ) | (100 | )% |
All acquisition related costs, net related to the acquisition of certain assets from BioOne were recorded in 2010, in which $(0.2) million and $0.2 million were recorded during the three and nine months ended September 30, 2010, respectively. There were no acquisition related costs, net recorded during the three and nine months ended September 30, 2011.
Non-Operating Income (Expense), net
Non-operating income (expense), net consists of mark-to-market adjustments related to the calculated fair value of our outstanding warrants, foreign exchange gain (loss), interest charges incurred on our note payable, interest earned from our short-term investment portfolio, and other non-operating gains and losses.
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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(in thousands, except percentages) | 2011 | 2010 | Change | 2011 | 2010 | Change | ||||||||||||||||||||||||||
Gain (Loss) from revaluation of warrant liability |
$ | 5,439 | $ | (721 | ) | $ | 6,160 | 854 | % | $ | 3,822 | $ | (2,336 | ) | $ | 6,158 | 264 | % | ||||||||||||||
Foreign exchange gain (loss) |
(39 | ) | 827 | (866 | ) | (105 | )% | 400 | (246 | ) | 646 | 263 | % | |||||||||||||||||||
Interest expense |
(394 | ) | (226 | ) | (168 | ) | 74 | % | (847 | ) | (458 | ) | (389 | ) | 85 | % | ||||||||||||||||
Other expense, net |
(22 | ) | (8 | ) | (14 | ) | 175 | % | (25 | ) | (33 | ) | 8 | (24 | )% | |||||||||||||||||
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Total non-operating income (expense), net |
$ | 4,984 | $ | (128 | ) | $ | 5,112 | 3,994 | % | $ | 3,350 | $ | (3,073 | ) | $ | 6,423 | 209 | % | ||||||||||||||
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Warrant liability
Gain (loss) from revaluation of warrant liability improved by $6.2 million for both the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010, respectively, primarily due to the change in our underlying stock price, which declined during the three months ended September 30, 2011, as compared to the strike price of the warrants. In August 2009 and November 2010, we issued warrants to purchase an aggregate of 2.4 million and 3.7 million shares of common stock, respectively, in connection with offerings of our common stock. The fair value of these outstanding warrants, which uses the binomial-lattice option-pricing model, is classified as a liability on the condensed consolidated balance sheets and is adjusted at each subsequent reporting period, until such time the instruments are exercised or otherwise modified to remove the provisions which require this treatment. 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 liabilities to stockholders equity and no further adjustment to the fair value would be made in subsequent periods. Further changes in stock price will result in similar adjustment as needed.
Foreign exchange gain (loss)
Foreign exchange gain (loss) declined by $0.9 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010, which was primarily attributable to unfavorable foreign currency variations between the Euro and U.S. dollar, our functional currency. Foreign exchange gain (loss) improved by $0.6 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, which was primarily attributable to favorable foreign currency variations over that time period between the Euro and U.S. dollar, our functional currency.
Interest expense
Interest expense increased by $0.2 million and $0.4 million for the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010, respectively, primarily due to the acceleration of the closing cost and fees associated with the repayment of our prior debt and interest incurred from borrowings on our prior credit facility, and to a lesser extent, from the financing of leasehold improvements for our headquarters.
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Other expense, net
Other expense, net was relatively consistent during the three and nine months ended September 30, 2011 and 2010.
We expect to earn interest income at market rates in proportion to the marketable securities balances we maintain. We generally hold such investments until such time as we liquidate them to meet an operating cash need. Interest paid on our investment portfolio may decrease and the value of certain securities we hold may decline, which could negatively affect our financial condition, cash flow and reported earnings.
Liquidity and Capital Resources
In recent years, our sources of capital have primarily consisted of public offerings and private placements of equity securities, debt instruments, United States government grants and cooperative agreements, and contribution from product sales, net of expenses, and interest income.
At September 30, 2011, we had cash, cash equivalents and short-term investments of $15.2 million. Our cash equivalents and short-term investments primarily consist of marketable debt securities, which primarily include money market instruments and, to a lesser extent, United States government agency securities, and are classified as available-for-sale.
Operating Activities
Net cash used in operating activities was $14.5 million for the nine months ended September 30, 2011 compared to $10.2 million during the nine months ended September 30, 2010. The increase in net cash used in operating activities was primarily due to changes in our operating assets and liabilities, notably inventory, which increased significantly during the nine months ended September 30, 2011 from December 31, 2010. We increased inventory levels in order to be able to fulfill anticipated future customer demand for our products, coupled with the management of our supply chain.
Investing Activities
Net cash provided by investing activities during the nine months ended September 30, 2011 was $0.3 million compared to $0.3 million net cash used in investing activities during the nine months ended September 30, 2010. The increase in investing activities was primarily due to purchasing less furniture, equipment and leasehold improvements during the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010, in which we incurred costs related to the consolidation and improvement of our facilities. This change was offset by a decrease in our investment activities during the nine months ended September 30, 2011 as the proceeds received from the maturities of our existing investments are generally reinvested in money market funds with original maturities of less than 90 days.
Financing Activities
Net cash provided by financing activities were minimal during the nine months ended September 30, 2011 compared to $5.2 million during the nine months ended September 30, 2010. The decrease in financing activities was primarily due to the repayment of our prior debt associated with a growth capital facility agreement with Oxford, which was issued in March 2010. The repayment of our prior debt was a result of using substantially all of the proceeds we received from the Credit Agreement in September 2011.
Working Capital
Working capital decreased to $16.5 million at September 30, 2011, from $22.1 million at December 31, 2010, primarily due to lower balances in cash and investments, which were used for our operations, and increases in the combined total for our accounts payable and accrued liabilities balances as a result of the timing of payments to our vendors. This was partially offset by decreases in our warrant liability, which involves calculating the fair value using the binomial-lattice option-pricing model, increases in inventory levels in order to be able to fulfill anticipated future customer demand for our products coupled with the management of our supply chain and decreases in the current portion of our long-term debt, as we entered into a new credit facility that allows for interestonly payments due for the first twelve months.
Capital Requirements
Our near-term capital requirements are dependent on various factors, including operating costs and working capital investments associated with commercializing the INTERCEPT Blood System, costs associated with pursuing regulatory approval in geographies where we do not currently sell our platelet and plasma systems, costs associated with planning and conducting studies and clinical development of our red blood cell system, timing and magnitude of payments under grants from the United States government, and
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costs related to creating, maintaining and defending our intellectual property. Our long-term capital requirements will also be dependent on competitive developments and regulatory factors. Until we are able to generate a sufficient amount of product revenue and generate positive net cash flows from operations, meeting our long-term capital requirements is in large part subject to access to public and private equity and debt capital markets, as well as to additional collaborative arrangements with partners or government grants, augmented by cash generated from operations and interest income earned on the investment of our cash balances and short-term investments. We believe that cash received from product sales and government grants, our available cash balances, and access to debt will be sufficient to meet our capital requirements for at least the next twelve months. If our assumptions prove to be incorrect, we could consume our available capital resources sooner than we currently expect.
We may borrow additional capital from institutional and commercial banking sources to fund future growth on terms that may include restrictive covenants, which may comprise of covenants that restrict the operation of our business, liens on assets, high effective interest rates and repayment provisions that reduce cash resources and limit future access to capital markets. To the extent we raise additional capital by issuing equity securities, including common stock issued pursuant to the Sales Agreement, our stockholders may experience substantial dilution. To the extent that we raise additional funds through collaboration or partnering arrangements, we may be required to relinquish some of our rights to our technologies or rights to market and sell our products in certain geographies, or grant licenses on terms that are not favorable to us. The disruptions to the global credit and financial markets and general economic uncertainty has generally made equity and debt financing more difficult to obtain and the terms less favorable to the companies seeking to raise financing. As a result of these and other factors, we do not know whether additional capital will be available when needed, or that, if available, we will be able to obtain additional capital on reasonable terms. If we are unable to raise additional capital due to disruptions to the global credit and financial markets and general economic uncertainty or other factors, we may need to curtail planned development or commercialization activities.
Other Information
Historically, we have received significant awards in funding under cooperative agreements with the DoD for the INTERCEPT Blood System. Any such funding is subject to the authorization of funds and approval of our research plans by various organizations within the federal government, including the United States Congress. The general economic environment, coupled with tight federal budgets, has led to a general decline in the amount available for government funding. If we are unable to obtain further funding for federal grants and cooperative agreements for the continued development of the INTERCEPT Blood System in the United States at levels similar to past funding, we may need to reduce our operating expenses, which would delay progress in some of our development programs.
In late October 2008, we filed a shelf registration statement on Form S-3 to offer and sell up to $200.0 million of common stock, preferred stock, warrants, and/or debt securities, which registration statement expires in December 2011. We have issued approximately $34.2 million of the securities registered for issuance pursuant to the shelf registration statement.
In June 2011, we entered into the Sales Agreement with MLV, pursuant to which we may, but are not required to, issue and sell shares of our common stock having an aggregate offering price of up to $20.0 million from time to time through MLV as our sales agent. The issuance and sale of these shares by us under the Sales Agreement, if any, is subject to the effectiveness of our shelf registration statements on Form S-3, initially filed with the SEC in October 2008 and August 2009. Sales of our common stock through MLV, if any, will be made on The NASDAQ Global Market by means of ordinary brokers transactions at market prices, in block transactions or as otherwise agreed by us and MLV. Subject to the terms and conditions of the Sales Agreement, MLV will use commercially reasonable efforts to sell our common stock from time to time, based upon our instructions (including any price, time or size limits or other customary parameters or conditions we may impose). We are not obligated to make any sales of common stock under the Sales Agreement. The offering of shares of our common stock pursuant to the Sales Agreement will terminate upon the earlier of (1) the sale of all common stock subject to the Sales Agreement and (2) termination of the Sales Agreement. The Sales Agreement may be terminated by MLV or us at any time upon 10 days notice to the other party, or by MLV at any time in certain circumstances, including our undergoing a material adverse change. We will pay MLV an aggregate commission rate equal to 3.0% of the gross proceeds of the sales price per share of any common stock sold through MLV under the Sales Agreement. We did not place any common stock under the Sales Agreement during the three and nine months ended September 30, 2011.
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Commitments and Off-Balance Sheet Arrangements
Commitments
The following summarizes our commitments at September 30, 2011 (in thousands):
Total | Less than 1 year |
1 3 years | 4 5 years | After 5 years | ||||||||||||||||
Minimum purchase requirements |
$ | 2,861 | $ | 1,918 | $ | 843 | $ | 100 | $ | 0 | ||||||||||
Operating leases |
1,759 | 711 | 971 | 77 | 0 | |||||||||||||||
Other commitments |
1,502 | 466 | 294 | 287 | 455 | |||||||||||||||
Long-term note payable |
5,874 | 292 | 3,544 | 2,038 | 0 | |||||||||||||||
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Total contractual obligations |
$ | 11,996 | $ | 3,387 | $ | 5,652 | $ | 2,502 | $ | 455 | ||||||||||
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Minimum purchase requirements
Our minimum purchase commitments include certain components of our INTERCEPT Blood System which we purchase from third party manufacturers and supply to Fenwal at no cost for use in manufacturing finished disposable kits.
Operating leases
We generally lease our office facilities and certain equipment under non-cancelable operating leases with initial terms in excess of one year that require us to pay operating costs, property taxes, insurance and maintenance. These facility leases generally contain renewal options and provisions adjusting the lease payments if those renewal options are exercised. Our lease payments have increased as we exercised a ten year extension option on December 10, 2009 to extend the term of our Concord California lease. Our facility leases qualify as operating leases under ASC Topic 840, Leases and as such, are not included on our condensed consolidated balance sheet.
Other commitments
Our other commitments primarily consist of obligations for landlord financed leasehold improvements, which are in addition to the operating leases we have for office and laboratory space. We pay for the financed leasehold improvements as a component of rent and are required to reimburse our landlords over the remaining life of the respective leases. Our Concord California lease may be canceled no earlier than December 2014, at which time we would be required to pay for any remaining portion of the landlord financed leasehold improvements. At September 30, 2011, we had an outstanding liability of $1.0 million related to these leasehold improvements.
Long-term note payable
In September 2011, we entered into a Credit Agreement with Comerica. The Credit Agreement provides for a growth capital loan of up to $8.0 million, or Growth Capital Loan, and a formula based revolving line of credit, or RLOC, of up to $4.0 million plus any unused amounts from the Growth Capital Loan. Under the Credit Agreement, we are limited to an aggregate borrowing of up to $10.0 million at any time. We pledged all current and future assets, excluding our intellectual property and 35% of our investment in our subsidiary, Cerus Europe B.V., as security for borrowings under the Credit Agreement.
Concurrent with the execution of the Credit Agreement, in September 2011, we borrowed and issued $5.0 million of the Growth Capital Loan, or Growth Capital Loan A, substantially all of which was used to repay our prior debt with Oxford, with the remainder used for general corporate purposes. Growth Capital Loan A, which matures in 48 months, bears a fixed interest rate of 6.37%, with interestonly payments due for the first twelve months, followed by equal principal and interest payments for the remaining 36 months.
We may draw up to an additional $3.0 million of the Growth Capital Loan, or Growth Capital Loan B between December 31, 2011 and June 30, 2012. Growth Capital Loan B will bear a fixed interest rate based on the higher of (i) 6.25% or (ii) 6.00% plus the three month LIBOR rate at the date of draw, with interestonly payments due for the first six months followed by equal principal and interest payments for the remaining 36 months.
In September 2011, we paid a commitment fee of $40,000 and loan fees of $50,000, which were recorded as a discount to our Growth Capital Loan A and are being amortized as a component of interest expense using the effective interest method over the term of the Growth Capital Loan A (discount was based on an implied interest rate of 7.07%). We will also be required to make a final payment fee of 1% of the amounts drawn under Growth Capital Loan A and Growth Capital Loan B due on the earlier of (i) prepayment of the Growth Capital Loan or (ii) the maturity of the
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Growth Capital Loan. The final payment fee will be accreted to interest expense using the effective interest method over the life of the Growth Capital Loan A and B upon draw.
The Credit Agreement also provides for a RLOC of up to $4.0 million plus any unused amounts from the Growth Capital Loan B, or the RLOC Loan Amount. The amount available under the RLOC, which is available to us until September 30, 2013, is limited to the lesser of (i) 80% of eligible trade receivables or (ii) the RLOC Loan Amount. The RLOC will bear a floating rate based on the lenders prime rate plus 1.50%, with interestonly payments due each month. We will be required to repay the principal drawn from the RLOC at the end of the RLOC term. In September 2011, we paid a commitment fee of $20,000, and will pay the same commitment fee at each annual anniversary of the RLOC. As of September 30, 2011, we had not drawn down any amounts under the RLOC.
We are required to maintain compliance with certain customary and routine financial covenants under the Credit Agreement. Throughout the term of the Credit Agreement, we are also obligated to meet certain conditions which include maintaining a minimum cash balance of $2.5 million and achieving minimum revenue levels, which will be measured monthly based on a six-month trailing basis and must be at least 75% of the pre-established future projected revenues for the six-month period. Non-compliance with the covenants could result in the principal of the note becoming due and payable. As of September 30, 2011, we were in compliance with the financial covenants as set forth in the Credit Agreement.
Financial Instruments
We maintain an investment portfolio of various securities, which are classified as available-for-sale and, consequently, are recorded on the condensed consolidated balance sheet at fair value with unrealized gains or losses reported as a separate component of stockholders equity. Our investment policy is to manage our marketable securities portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio to assist us in funding our operations. Unrealized gains were minimal at September 30, 2011. Unrealized gains totaled $0.1 million at December 31, 2010.
We invest our cash, cash equivalents and short-term investments in a variety of financial instruments, consisting primarily of high credit, high liquidity United States government agency securities, money market funds and interest-bearing accounts with financial institutions. Our money market funds are classified as Level 1 in the fair value hierarchy, in which quoted prices are available in active markets, as the maturity of money market funds are relatively short and the carrying amount is a reasonable estimate of fair value. Our available-for-sale securities related to United States government agencies and corporate debt securities are classified as Level 2 in the fair value hierarchy, which uses observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. We maintain portfolio liquidity by ensuring that the securities have active secondary or resale markets. Certain of the investments in our portfolio are subject to general market risk and more specifically, the United States mortgage industry and financial institutions. We did not record any other-than-temporary impairment losses during the three and nine months ended September 30, 2011 and 2010. The current global economic crisis has had, and may continue to have, a negative impact on the market values of the investments in our investment portfolio. There can be no assurance that the markets for these securities will not deteriorate further or that the institutions that these investments are with will be able to meet their debt obligations at the time we may need to liquidate such investments or until such time as the investments mature.
Off-Balance Sheet Arrangements
As of September 30, 2011, we had no contractual arrangements that create potential material risk for us and are not recognized in our condensed consolidated balance sheets.
New Accounting Pronouncements
In May 2011, the FASB issued updated fair value measurement guidance under ASU No. 2011-14 Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, surrounding changes in the valuation premise of highest and best use of an asset, the application of premiums and discounts, and enhanced disclosure requirements. Under ASU No. 2011-14, the measurement of fair value of financial instruments will primarily be measured at the level of the unit of account whereas it was historically able to utilize the valuation premise of highest and best use of an asset, which can be applied primarily to measuring the fair value of nonfinancial assets only going forward. In addition, the application of blockage factors and other premiums and discounts in a fair value measurement will be prohibited in the valuation of all fair value levels of the hierarchy. The new disclosure requirements include, but are not limited to, further qualitative and quantitative discussions regarding level 3 fair value measurements, specifically significant unobservable inputs used, description of the valuation processes and sensitivity analysis, the disclosure of any transfers and the reasons thereof between levels 1 and 2, and the determination of assets and liabilities that are not recorded at fair value to be categorized under the fair value hierarchy. The updated
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fair value measurement guidance is effective for interim and annual periods beginning after December 15, 2011, which will begin for us on January 1, 2012. We do not anticipate that the additional disclosure requirements will have a material impact on the condensed consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05 Presentation of Comprehensive Income, which eliminates the presentation of other comprehensive income from the consolidated statements of stockholders equity. Instead, companies would have the option to display net income and other comprehensive income in two separate, but consecutive statements or combine net income and other comprehensive income in one continuous statement, which would be referred to the consolidated statements of comprehensive income. The new presentation requirements under this guidance are effective for interim and annual periods beginning after December 15, 2011, which will begin for us on January 1, 2012, and retrospective application is required for all periods presented. We do not anticipate that the additional disclosure requirements will have a material impact on the condensed consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08 Testing Goodwill for Impairment, which allows a company to test goodwill for impairment by first assessing the qualitative factors, which has also been updated under this guidance, to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount. If a company determines that it is more likely than not that the fair value of a reporting unit is less than the carrying amount, a 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. Under ASU No. 2011-08, the qualitative assessment is optional, such that a company has the choice to perform the goodwill impairment test under the original quantitative two-step approach only. The optional qualitative procedure for testing goodwill impairment under this guidance is effective for interim and annual periods beginning after December 15, 2011, which will begin for us on January 1, 2012; however, early adoption is permitted. We do not anticipate that the update to this accounting standard will have a material impact on the condensed consolidated financial statements.
Additional recent accounting pronouncements that are of significance, or potential significance, to us are set forth in the our Annual report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 16, 2011 under Note 1 of the Notes to Consolidated Financial Statements.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
During the three and nine months ended September 30, 2011, there were no material changes to our market risk disclosures as set forth in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2010.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) for our company. Based on their evaluation of our disclosure controls and procedures as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2011.
Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable assurance, not absolute assurance, that the objectives of our disclosure control system are met and, as set forth above, our principal executive officer and principal financial officer have concluded, that based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were sufficiently effective to provide reasonable assurance that the objective of our disclosure control system were met.
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ITEM 1. | LEGAL PROCEEDINGS |
None.
ITEM 1A. | RISK FACTORS |
Risk Factors
Our business faces significant risks. If any of the events or circumstances described in the following risks actually occurs, our business may suffer, the trading price of our common stock could decline and our financial condition or results of operations could be harmed. These risks should be read in conjunction with the other information set forth in this report. The risks and uncertainties described below are not the only ones facing us. There may be additional risks faced by our business. Other events that we do not currently anticipate or that we currently deem immaterial also may adversely affect our financial condition or results of operations.
The INTERCEPT Blood System may not achieve broad market acceptance.
We may encounter governmental and transfusion medicine community resistance to commercial adoption for any or all of our products. In addition to our customers, we must also address issues and concerns from broad constituencies involved in the healthcare system, from patients, to transfusing physicians, hospitals, private and public sector payors, regulatory bodies and public health authorities. We may be unable to demonstrate to these constituencies that the INTERCEPT Blood System is safe, effective and economical or that the benefits of using the INTERCEPT Blood System products justify their cost.
Use of the platelet system results in some processing loss of platelets. If the loss of platelets leads to increased costs for our customers, our customers or prospective customers believe that the loss of platelet reduces the efficacy of the transfusion unit, or our process requires changes in blood center or clinical regimens, prospective customers may not adopt our platelet system. Certain studies have indicated that transfusion of conventionally prepared platelets may yield higher post-transfusion platelet counts (according to a measurement called corrected count increment) and may be more effective than transfusion of INTERCEPT-treated platelets. While studies also demonstrate that INTERCEPT-treated platelets retain therapeutic function comparable to conventional platelets, customers may choose not to adopt our platelet system due to considerations relating to corrected count increment or efficacy.
Our products do not inactivate all known pathogens, and the inability of our systems to inactivate certain pathogens may limit their acceptance. For example, due to the biology of certain non-lipid enveloped viruses, including the hepatitis A virus, our products have not been demonstrated to inactivate these viruses. In addition, for human parvovirus B-19, which is also a non-lipid-enveloped virus, our testing has not demonstrated a high level of inactivation. Although we have shown high levels of inactivation of a broad spectrum of lipid-enveloped viruses, some customers may choose not to adopt our products based on considerations concerning inability to inactivate, or limited inactivation, of certain non-lipid-enveloped viruses. Similarly, although our product has been demonstrated to effectively inactivate spore-forming bacteria, our products have not been shown to be effective in inactivating bacterial spores, once formed. In addition, since prions do not contain nucleic acid, our products do not inactivate prions. While transmission of prions has not been a major problem in blood transfusions, and we are not aware of any competing products that inactivate prions, the inability to inactivate prions may limit market acceptance of our products.
We have conducted pre-clinical and clinical studies of our products in both in vivo and in vitro environments using well-established tests that are accepted by regulatory bodies. When an in vitro test was not generally available or not well-established, we conducted in vivo studies in mammalian models to predict human responses. Although we have no reason to believe that the in vitro and in vivo studies are not predictive of actual results in humans, we cannot be certain that the results of these in vitro and in vivo studies accurately predict the actual results in humans in all cases. To the extent that actual results in human patients differs from the results of our in vitro or in vivo testing, market acceptance of our products may be negatively impacted.
Furthermore, due to limitations of detective tests, we cannot exclude that a sufficient quantity of pathogen or pathogens may still be present in active form which could present a risk of infection to the transfused patient. Such uncertainty may limit the market acceptance of our products.
If customers experience operational or technical problems with the use of INTERCEPT Blood System products, market acceptance may be reduced. For example, if adverse events arise from incomplete inactivation of pathogens, improper processing or user error, or if testing of INTERCEPT-treated blood samples fails to reliably confirm pathogen inactivation, whether or not directly attributable to the INTERCEPT Blood System, customers may refrain from purchasing the products. In addition, there is a risk that further studies we or others may conduct will show results inconsistent with previous studies. Should this happen, potential customers may delay or choose not to adopt our products, and existing customers may cease use of our products.
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Market acceptance of our products is affected by blood center budgets and the availability of reimbursement from governments, managed care payors, such as insurance companies, or other third parties. In many cases, due to the structure of the blood products industry, we will have little control over budget and reimbursement discussions, which generally occur between blood centers and national or regional ministries of health and private payors. Even if a particular blood center is prepared to adopt the INTERCEPT Blood System, our hospital customers may not accept, or may not have the budget to purchase, INTERCEPT-treated blood products. Since blood centers would likely not eliminate the practice of screening donors or testing blood for pathogens prior to transfusion, even after implementing our products some blood centers may not be able to identify enough cost offsets to afford to purchase our products. Budgetary concerns may be further exacerbated by the economic austerity programs implemented in European countries, which may limit the adoption of new technologies, including our products. Furthermore, it is difficult to predict the reimbursement status of newly approved, novel medical device products. In certain countries, governments have issued regulations relating to the pricing and profitability of medical products and medical products companies. The recently enacted health care reform laws in the United States and proposed restructuring of the Medicare and Medicaid systems have also placed downward pressure on the pricing of medical products.
Product adoption in Europe and other regions may be negatively affected because we do not have Food and Drug Administration, or FDA, approval for any of our products. In addition, if we do not achieve widespread product adoption in key European countries, adoption in other countries may be affected.
The market for the INTERCEPT Blood System is highly concentrated with few customers, including often-dominant regional or national blood collection entities. Even if our products receive regulatory approval and reimbursement is available, failure to effectively market, promote, distribute, price or sell our products to any of these large customers could significantly delay or even diminish potential product revenue in those geographies. The market for our pathogen inactivation systems in the United States is highly concentrated, dominated by a small number of blood collection organizations. In many countries in Western Europe and in Japan, various national blood transfusion services or Red Cross organizations collect, store and distribute virtually all of their respective nations blood and blood components supply. In Europe, the largest markets for our products are in Germany, France, and England. In Germany, decisions on product adoption and subsequent reimbursement are expected to be on a regional or even blood center-by-blood center basis, but depend on both local approvals and centralized regulatory approvals from the Paul Ehrlich Institute, or PEI. Product characteristics relating to platelet dose of INTERCEPT-treated platelets that have received marketing authorization from the PEI may be incompatible with market requirements. Some potential customers may await further safety information or additional studies before choosing whether to adopt our products. Customers or prospective customers may conduct and complete their own clinical trials before adopting our products. For instance, we have been informed by the largest group of blood centers in Germany that it will complete a clinical trial before purchasing our products on a routine basis. We cannot predict the final trial design, number of transfusions, enrollment duration, estimated time it will take to complete such a trial, or trial outcome. While INTERCEPT-treated platelets and plasma have received in-country regulatory approval and reimbursement rates have been established in France, adoption throughout France has been limited to certain blood centers. Decisions on product adoption in England are centralized with the National Blood Service and we understand that the National Blood Service has decided to implement bacterial detection testing before considering pathogen inactivation. The Japanese Red Cross controls a significant majority of blood transfusions in Japan and exerts a high degree of influence on the adoption and use of blood safety measures in Japan. The Japanese Red Cross has been reviewing preclinical and clinical data on pathogen inactivation of blood over a number of years and has yet to make a formal determination to adopt any pathogen inactivation approach. Before the Japanese Red Cross considers our products, we understand that we may need to commit to making certain product configuration changes in order to allow the INTERCEPT Blood System to integrate with the collection platforms of the Japanese Red Cross.
Adverse market and economic conditions may exacerbate certain risks affecting our business.
Sales of our products are dependent on reimbursement from government health administration authorities, distribution partners and other organizations. As a result of adverse conditions affecting the global economies and credit and financial markets, including the current sovereign debt crisis in certain countries in Europe and disruptions due to political instability or otherwise, these organizations may be unable to satisfy their reimbursement obligations, or may delay payment for the INTERCEPT Blood System. In addition, political and economic instability in Europe may in turn diminish the value of the Euro, which could reduce our reported product revenue.
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Our products, blood products treated with the INTERCEPT Blood System and we are subject to extensive regulation by domestic and foreign authorities. If our preclinical and clinical data are not considered sufficient by a countrys regulatory authorities to grant marketing approval, we will be unable to commercialize our products and generate revenue in that country. Our red blood cell system requires extensive additional testing and development.
Our products, both those sold commercially and those under development are subject to extensive and rigorous regulation by local, state and federal regulatory authorities in the United States and by foreign regulatory bodies. These regulations are wide-ranging and govern, among other things:
| development; |
| testing; |
| manufacturing; |
| labeling; |
| storage; |
| pre-market clearance or approval; |
| sales and distribution; |
| use standards and documentation; |
| post-launch surveillance; |
| quality; |
| advertising and promotion; and |
| reimbursement. |
Our products are in various stages of development and regulatory approval, and we face the risks of failure inherent in developing medical devices and biotechnology products based on new technologies. Our products must satisfy rigorous standards of safety and efficacy and we must adhere to quality standards regarding manufacturing and customer-facing business processes before the FDA and international regulatory authorities can approve them for commercial use. For our product candidates, we must provide the FDA and international regulatory authorities with preclinical, clinical and manufacturing data demonstrating that our products are safe, effective and in compliance with government regulations before the products can be approved for commercial sale. The process of obtaining FDA and other required regulatory approvals is expensive and uncertain, and typically takes a number of years. We may continue to encounter significant delays or excessive costs in our efforts to secure necessary approvals or licenses, or we may not be successful at all.
Clinical trials are particularly expensive and have a high risk of failure. Any of our product candidates may fail in the testing phase or may not achieve results sufficient to attain market acceptance, which could prevent us from achieving profitability. We do not know whether we will begin and conduct planned clinical trials on schedule, if at all. Significant delays in clinical testing could materially impact our clinical trials. Criteria for regulatory approval in blood safety indications are evolving with competitive advances in the standard of care against which new product candidates are judged, as well as with changing market needs and reimbursement levels. Clinical trial design, including enrollment criteria, endpoints, and anticipated label claims are thus subject to change, even if original objectives are being met. In addition to the reasons stated above, clinical trials can be delayed for a variety of reasons, including delays in obtaining regulatory approval to commence a study, delays in reaching agreement on acceptable clinical study agreement terms with prospective clinical sites, delays in obtaining institutional review board approval to conduct a study at a prospective clinical site and delays in recruiting subjects to participate in a study. We do not know whether any clinical trials will result in marketable products. Typically, there is a high rate of failure for product candidates in preclinical and clinical trials and products emerging from any successful trial may not reach the market for several years.
Enrollment criteria for certain of our clinical trials may be quite narrow. For instance, clinical trials previously conducted using INTERCEPT-treated plasma for patients with thrombotic thrombocytopenic purpura lasted approximately four years due in part, to the difficulties associated with enrolling qualified patients. Consequently, we may be unable to recruit suitable patients into clinical trials on a timely basis, if at all. We cannot rely on interim results of trials to predict their final results, and acceptable results in early trials might not be repeated in later trials. Any trial may fail to produce results satisfactory to the FDA or foreign regulatory authorities. In addition, preclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval. Negative or inconclusive results from a preclinical study or clinical trial or adverse medical events during a clinical trial could cause a preclinical study or clinical trial to be repeated, require other studies to be performed or cause a program to be terminated, even if other studies or trials relating to a program are successful.
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Outside the United States, regulations vary by country, including the requirements for approvals or clearance to market, the time required for regulatory review and the sanctions imposed for violations. In addition to CE mark documentation, countries outside the European Union may require clinical data submissions, registration packages, import licenses or other documentation.
In May 2007, we obtained a CE mark extension in our name from European Union regulators for our platelet system and will need to obtain an extension every five years. We or our customers may also be required to conduct additional testing in order to obtain regulatory approval in countries that do not recognize the CE mark as being adequate for commercializing the INTERCEPT Blood System in those countries. The level of additional product testing varies by country, but could be expensive or take a long time to complete. In addition, regulatory agencies are able to withdraw or suspend previously issued approvals.
We completed our Phase III clinical trial of the platelet system in the United States in March 2001 and submitted data from this trial, along with several other modules of our pre-market approval application, to the FDA. Based on discussions with the FDA, we performed an additional blinded analysis of the clinical trial data, under the direction of an independent expert physician panel, to determine if apparent differences between treatment groups in the category of pulmonary adverse events reported in the study were attributable to discrepancies in safety results. The reassessment of primary patient records by the expert physician panel showed no statistically significant differences between groups. This reassessment differed from the earlier analysis of adverse events that was based on clinical trial case report forms and had shown statistically significant differences in specific pulmonary events. We submitted a report of the analysis to the FDA for review. We understand that our reassessment of our previously completed Phase III clinical trial data will not be sufficient to address the FDAs questions. In November 2009, we and the FDA presented a proposed clinical trial protocol for a second Phase III clinical trial to the FDAs Blood Product Advisory Committee, or BPAC. Although the BPAC agreed with the proposed trial design, safety endpoints and efficacy endpoints, we believe we will need to reach agreement with the FDA on the means necessary to satisfy the BPACs request for more stringent safety margins than we had proposed. In order to meet the more stringent safety margins, we may need to enroll and collect data from more patients than what we had initially proposed to BPAC. Until the final study size and design requirements are determined, we will not be able to assess the feasibility of a second Phase III trial. The dimensions of such a Phase III trial may be prohibitive due either to prospective cost, availability of patients in the target population, or logistics. We have no plans to initiate such a trial unless adequate funding is secured. The additional Phase III clinical trial will need to be completed and data submitted to the FDA before we can complete our regulatory submission.
We obtained a CE mark approval in Europe for our plasma system in November 2006 and final French approval of INTERCEPT-treated plasma in May 2007. In February 2011, the first approval for use of INTERCEPT-treated plasma was obtained from the Paul Ehrlich Institute by a blood center in Germany. In some countries, including several in Europe, we or our customers may be required to perform additional clinical studies or submit manufacturing and marketing applications in order to obtain regulatory approval.
We have completed Phase IIIa, Phase IIIb and Phase IIIc clinical trials of the plasma system, in the United States, reports for which were filed with the FDA during 2005. We have not submitted any applications for regulatory approval of the plasma system in the United States or any other regions other than in Europe. INTERCEPT-treated plasma was recently granted orphan drug status by the FDA for the treatment of thrombotic thrombocytopenic purpura. Although we have completed clinical trials in this patient population, the FDA may require us to complete additional clinical trials before approval would be granted. Should the FDA require us to complete additional clinical trials, we would need to secure adequate funding before we would initiate a trial.
Before the FDA determines whether to approve the INTERCEPT Blood System products, we expect our approval applications to be reviewed by BPAC. Should the FDA ask BPAC questions, we expect BPAC to answer those questions and make recommendations to the FDA. Even if BPAC were to recommend approval of one or more of our products, the FDA would not necessarily have to approve those products. If BPAC were to answer FDA questions recommending against approval of one or more of our products, the FDA would have to take into consideration the points of concern raised by BPAC which could affect the approval of the products.
If our product candidates receive approval for commercial sale in the United States, their marketing and manufacturing will be subject to continuing FDA and other regulatory requirements, such as requirements to comply with Good Manufacturing Practice, or GMP, and ISO 13485, a quality management system standard applicable to the products we sell in Europe. The failure to comply with these requirements on an ongoing basis could result in delaying or precluding commercialization efforts in certain geographies, including the United States, and could result in an enforcement action, which could harm our business. The current manufacturing sites we rely upon for producing the platelet and plasma system products for international distribution and sale are not FDA-qualified facilities. It will require both time and expense to obtain such qualification.
The FDA will require, and other regulatory authorities may also require, a post-marketing clinical study, which can involve significant expense. Governments or regulatory authorities may impose new regulations or other changes or we may discover that we are subject to additional regulations that could further delay or preclude regulatory approval and subsequent adoption of our potential products. We cannot predict the impact of adverse governmental regulation that might arise from future legislative or administrative action.
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We have conducted many toxicology studies to demonstrate the INTERCEPT platelet and plasma systems safety, and we have conducted and plan to conduct toxicology studies for the INTERCEPT red blood cell system throughout the product development process. At any time, the FDA and other regulatory authorities may require further toxicology or other studies to further demonstrate our products safety, which could delay commercialization. In addition, the FDA or foreign regulatory authorities may alter guidance at any time as to what constitutes acceptable clinical trial endpoints or trial design, which may necessitate a redesign of our product or proposed clinical trials and cause us to incur substantial additional expense or time in attempting to gain regulatory approval. We believe the FDA and other regulatory authorities are likely to weigh the potential risks of using our pathogen inactivation products against the incremental benefits, which may be difficult or impossible to quantify. We expect the FDA will require us to demonstrate a very low level of potential side effects in the proposed second Phase III trial of the platelet system.
As a result of the termination of Phase III clinical trials of our red blood cell system due to the detection of antibody reactivity to red blood cells treated with the INTERCEPT red blood cell system in two patients in the chronic arm of the trials, we have been conducting additional research and development activities on our red blood cell system to reduce the potential for antibody reactivity to treated red blood cells. Based upon an internal evaluation of the results from these additional research activities as well as additional in vitro and in vivo studies and after consulting with regulatory authorities, we initiated a new Phase I clinical trial in the fourth quarter of 2008 to test modifications to the red blood cell system. That new Phase I clinical trial was completed in early 2010, successfully meeting our primary endpoint of red cell recovery measured twenty-four hours after transfusion. In addition to red cell recovery, we also measured red cell lifespan, measured as the half-life of red cells circulating in transfusion recipients. INTERCEPT-treated red blood cells fell within the established normal reference range for red blood cells. Non-treated red cells were above the established normal reference range.
We plan to initiate a Phase III clinical trial in Europe upon acceptance of a clinical trial application by European regulators. We understand that the FDA will likely require us to complete an additional recovery and lifespan study and at least one additional Phase III clinical trial before we would be able to potentially obtain approval in the United States. Such studies could prolong development of the red blood cell program. Significantly lower lifespan for INTERCEPT-treated red blood cells compared to non-treated red blood cells may limit our ability to obtain regulatory approval for the product. We also understand that the planned Phase III clinical trial in Europe may be sufficient to receive CE mark but it would need to be supplemented by additional Phase III clinical trials for approval in certain countries in Europe, including France and Germany. These additional Phase III clinical trials will likely need to demonstrate equivalency of INTERCEPT-treated red blood cells compared to conventional red blood cells. A number of trial design issues that could impact efficacy, regulatory approval and market acceptance will need to be resolved prior to the initiation of further clinical trials. We will also need to complete a number of in-vitro studies, finalize development of the final commercial configuration of the red blood cell system and manufacture and validate sufficient quantities of the final red blood cell system prior to receiving regulatory approvals in Europe or the United States. Many of these activities will require capital beyond that which we currently have. If we are unsuccessful in advancing a modified red blood cell system through clinical trials, resolving process and product design issues or in obtaining subsequent regulatory approvals and acceptable reimbursement rates, we may never realize a return on our research and development expenses incurred to date in the red blood cell system program. Regulatory delays can also materially impact our product development costs. If we experience delays in testing, conducting trials or approvals, our product development costs will increase.
Regulatory agencies may limit the uses, or indications, for which any of our products are approved. For example, we believe that the INTERCEPT Blood System products will be able to claim the inactivation of particular pathogens only to the extent we have laboratory data to support such claims. After regulatory approval for the initial indications, further studies may be necessary to gain approval for the use of the product for additional indications.
In addition to the regulatory requirements applicable to us and to our products, there are regulatory requirements in several countries around the world, including the United States, Germany, Canada, Austria, and Australia, and other countries, applicable to our prospective customers of INTERCEPT Blood System products, the blood centers that process and distribute blood and blood products. In those countries, blood centers and other customers are required to obtain approved license supplements from the appropriate regulatory authorities in each country before making available blood products processed with our pathogen inactivation systems to hospitals and transfusing physicians. Our customers may lack the resources or capability to obtain such regulatory approvals. These requirements or regulators delays in approving license applications or supplements may deter some blood centers from using our products. Blood centers that do submit applications or supplements for manufacturing and sale may face disapproval or delays in approval that could provide further delay or deter them from using our products. The regulatory impact on potential customers could slow or limit the potential sales of our products.
In August 2010, in connection with our acquisition of certain assets from BioOne, we regained the rights to commercialize the platelet and plasma systems in Japan, China, Taiwan, South Korea, Vietnam, Thailand, and Singapore. Regulatory authorities in these countries may require our platelet and plasma systems to be widely adopted commercially in Europe or approved by the FDA before the platelet and plasma systems are considered for approval.
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We have limited experience operating a global commercial organization. We rely on third parties to market, sell, distribute and maintain our products and to maintain customer relationships in certain countries.
We are responsible for sales, marketing, distribution, maintenance and regulatory support of the INTERCEPT Blood System worldwide. If we fail in our efforts to develop or maintain such internal competencies or establish acceptable relationships with third parties on a timely basis, our attempts to commercialize the INTERCEPT Blood System may be irreparably harmed.
We have a wholly-owned subsidiary, headquartered in the Netherlands, dedicated primarily to selling and marketing the platelet and plasma systems in geographies where the INTERCEPT platelet and plasma systems are approved or can be imported through the import license process. We will need to maintain and continue to increase our competence in a number of functions, including sales, marketing, regulatory, inventory and logistics, customer service, credit and collections, risk management, and quality assurance systems. Many of these competencies require compliance with European Union and local standards and practices, with which we have limited experience.
We have entered into contracts, generally on a geographically exclusive basis, with distributors in countries where we have limited abilities to commercialize our pathogen inactivation products directly. We have entered into geographical distribution agreements for distribution in a number of countries. We rely on these distributors to obtain any necessary in-country regulatory approvals, market and sell the INTERCEPT Blood System, provide customer and technical product support, maintain inventories, and adhere to our quality system in all material respects, among other activities. While our contracts generally require distributors to exercise diligence, these distributors may fail to commercialize the INTERCEPT Blood System in their respective territories. They may fail to sell product inventory they have purchased from us to end customers. Initial purchases of illuminators or disposable kits by these third parties may not lead to follow-on purchases of disposable platelet and plasma system kits. We have limited visibility into the identity and requirements of blood banking customers these distributors may have. Accordingly, we may be unable to ensure our distributors properly maintain illuminators sold or provide quality technical services to the blood banking customers to which they sell. Agreements with our distributors typically require the distributor to maintain quality standards that are compliant with standards generally accepted for medical devices. We may be unable to ensure that our distributors are compliant with such standards. Distributors may irreparably harm relationships with local existing and prospective customers and our standing with the blood banking community in general. We may have little recourse, short of termination, in the event that a distributor fails to execute according to our expectations and contractual provisions.
Our manufacturing supply chain exposes us to significant risks
INTERCEPT platelet and plasma disposable kits are manufactured and assembled by Fenwal. Fenwal has agreed, through a supply agreement signed with us in December 2008, to manufacture disposable kits for the platelet and plasma systems for us. After 2013, Fenwal may terminate the supply agreement, provided that Fenwal shall have provided us thirty months prior notice of termination. Fenwal is our sole supplier for manufacture of these products. Fenwal may fail to manufacture an adequate supply of disposable kits or to do so on a cost effective basis, which would subject us to loss of revenue and reduced contribution margin if production of INTERCEPT disposable kits is produced at a facility that also produces Fenwal-branded products. Should production for Fenwals own products decline, our products may absorb more overhead, which would negatively impact our gross margins. We also have contracts with independent suppliers, including NOVA Biomedical Corporation, or NOVA, for the manufacture of illuminators and certain components of the INTERCEPT Blood System which are manufactured or assembled at facilities not owned by Fenwal. These contractors are our sole suppliers for such components. NOVA has not manufactured illuminators for a number of years. Should NOVA have difficulties manufacturing illuminators, we may not be able to supply customer demand or provide replacement illuminators to existing customers. Facilities at which the INTERCEPT Blood System or its components are manufactured may cease operations for planned or unplanned reasons, causing at least temporary interruptions in supply. We do not have qualified suppliers beyond those on whom we currently rely, and we understand that Fenwal relies substantially on sole suppliers of certain materials for our products. If we need to or choose to identify and qualify alternate suppliers, the process will be time consuming and costly. Even a temporary failure to supply adequate numbers of INTERCEPT Blood System components may cause an irreparable loss of customer goodwill. If we conclude that supply of the INTERCEPT Blood System or components from Fenwal and others is uncertain, we may choose to build and maintain inventories of raw materials, work-in-process components, or finished goods, which would consume capital resources and may cause our supply chain to be less efficient.
Some components of the illuminators are no longer manufactured, which will require us to identify and qualify replacement components and may require that we conduct additional studies, which could include clinical trials, to demonstrate equivalency or validate any required design or component changes. Future supply of illuminators is limited to availability of components, some of which are in short supply or are no longer manufactured. We will likely be required to redesign the illuminators used in the platelet and plasma systems to manage the risk of obsolete components. Such redesign may be expensive and lead to regulatory delays in obtaining approvals to market the redesigned device.
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Fenwal manufactures our platelet and plasma systems in facilities that are not FDA-approved. In order to be used in clinical studies or sold in the United States, our products would be required to be manufactured in FDA-approved facilities. FDA validation of manufacturing facilities, whether owned by Fenwal or by other parties, will be costly and time-consuming.
If we attempt to establish alternate manufacturers, we will be dependent on Fenwal to transfer know-how relevant to the manufacture of the INTERCEPT Blood System; however, certain of Fenwals materials, manufacturing processes and methods are proprietary to Fenwal. We may be unable to establish alternate sources of supply to Fenwal, NOVA, or other suppliers without having to redesign certain elements of the platelet and plasma systems. Such redesign may be costly, time consuming and require further regulatory review. Fenwal is not obligated to provide support for development and testing of improvements or changes we may make to the INTERCEPT Blood System. We may be unable to identify, select, and qualify such manufacturers or those third parties able to provide support for development and testing activities on a timely basis or enter into contracts with them on reasonable terms, if at all. Raw material and component suppliers may not meet quality specifications we have set, which would cause a disruption in supply and may lead to lost sales and irreparable damage to our customer relationships. Moreover, the inclusion of components manufactured by new suppliers could require us to seek new or updated approvals from regulatory authorities, which could result in delays in product delivery. We may not receive any such required regulatory approvals.
In the event of a failure by Fenwal or other manufacturers to perform their obligations to supply components of the INTERCEPT Blood System to us, damages recoverable by us may be insufficient to compensate us for the full loss of business opportunity. Our supply agreements with Fenwal and NOVA, and supply agreements with others contain limitations on incidental and consequential damages that we may recover. A suppliers potential liability in the event of non-performance may not be sufficient to compel the supplier to continue to act in conformity with our agreements.
Our product supply chain requires us to purchase certain components in minimum quantities and may result in a production cycle of more than one year. Significant disruptions to any of the steps in our supply chain process may result in longer productions cycles which could lead to inefficient use of cash.
We are in the early stages of commercializing the INTERCEPT Blood System and may not accurately forecast demand for the INTERCEPT Blood System. As a result, we may carry excess work-in-process or finished goods inventory, which would consume capital resources and may become obsolete, or our inventory may be inadequate to meet customer demand. We have entered into certain public tenders, some which call for us to maintain certain minimum levels of inventory. If Fenwal or third-party manufacturers fail to produce components or our finished products satisfactorily, at acceptable costs, and in sufficient quantities, we may incur delays, shortfalls and additional expenses, or non-compliance with certain public tenders which may in turn result in permanent harm to our customer relations or loss of customers. Our platelet and plasma system disposables have received regulatory approval for two-year shelf lives. We and our distributors may be unable to ship product to customers prior to the expiration of product shelf life, which would require that we destroy or consume the outdated inventory in product demonstration activities. Product expiration may in turn lead to elevated product demonstration costs or reduced gross margins.
The platelet system is not compatible with some commercial platelet collection methods.
The equipment and materials used to collect platelets vary by manufacturer and by geographic region. Platelets may be collected from a single donor by apheresis using an automated collection machine. Apheresis devices currently used in the United States and European markets differ, among other characteristics, in their ability to collect platelets in reduced volumes of plasma. Platelet concentrates may also be prepared from whole blood by pooling together platelets from multiple donors. There are two commonly used methods for preparing whole blood platelets: the buffy coat method, which is used extensively in Europe, and the pooled random donor method, which is used in the United States. Our system for platelets is designed to work with platelets collected and stored in storage solutions, called Intersol and SSP+, and for platelets suspended in plasma.
In order to address the entire market in the United States, we would need to develop and test additional configurations of the platelet system. We estimate that the majority of platelets used in the United States are collected by apheresis, though a significant minority is prepared from pooled random donor platelets derived from whole blood collections. In order to gain regulatory approvals for a pathogen inactivation system compatible with random donor platelets, we will need to perform additional product development and testing, including additional clinical trials. Similarly, to achieve market acceptance in certain geographies, we may be required to design, develop and test new product configurations for the platelet and plasma systems. These development activities would increase our costs significantly, and may not be successful.
Other manufacturers supplying blood component collection platforms to the market may resist our efforts to make the INTERCEPT Blood System compatible with their platforms and may have competing pathogen inactivation technologies. Attaining compatibility with collection platforms manufactured by others may require adaptations to either the INTERCEPT Blood System or to the collection platforms, which may be difficult to engineer, expensive to implement and test, require additional clinical trials, cause
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delays in regulatory approval and/or be commercially unattractive to pursue. These development activities will increase our costs significantly, and may not be successful. Market acceptance of the INTERCEPT Blood System may be delayed until the system receives regulatory approval for use on such other equipment, if required.
We have used prototype components in our preclinical studies and clinical trials of the INTERCEPT red blood cell system and have not completed the components commercial design. We will be required to identify and enter into agreements with third parties to manufacture the red blood cell system.
Our red blood cell system that was used in our preclinical studies and Phase I red blood cell trial was a prototype of the system to be used in the final products. As a result, we plan to perform additional preclinical and clinical studies using the commercial versions of the systems to demonstrate the acceptability of the commercial configuration and the equivalence of the prototypes and the commercial products, which may increase our expenses and delay the commercialization of our products. We may determine that the red blood cell system may not be commercially feasible from potential customers perspectives. If we fail to develop commercial versions of the INTERCEPT red blood cell system on schedule, our potential revenue would be delayed or diminished and our potential competitors may be able to bring products to market before we do.
In addition, the design and engineering effort required to complete the final commercial product will likely be substantial and time-consuming. As with any complex development effort, we expect to encounter design, engineering and manufacturing issues. Such issues have previously arisen, sometimes unexpectedly, and solutions to these issues have not always been readily forthcoming. Additional unforeseen design, engineering and manufacturing issues may arise in the future, which could increase the development cost and delay commercialization of our products.
We will need to identify and contract with manufacturers who can develop processes to manufacture components and the compounds used in the red blood cell system. For commercial manufacturing, we will need to demonstrate to regulatory authorities that the commercial scale manufacturing processes comply with government regulations and that the compounds are equivalent to originally licensed compounds. It may be difficult to economically manufacture the red blood cell system on a commercial scale.
If our competitors develop superior products to ours or market their products more effectively than we market our products, our commercial opportunities could be reduced or eliminated.
We expect our products to encounter significant competition. The INTERCEPT Blood System products compete with other approaches to blood safety currently in use, and may compete with future products that may be developed by others. Our success will depend in part on our ability to respond quickly to customer and prospective customer needs and medical and technological changes brought about by the development and introduction of new products. Competitors products or technologies may make our products obsolete or non-competitive before we are able to generate any significant revenue. In addition, competitors or potential competitors may have substantially greater financial and other resources than we have. They may also have greater experience in preclinical testing, human clinical trials and other regulatory approval procedures. If competitors products experience significant problems, customers and potential customers may question the safety and efficacy of all pathogen inactivation technologies, including the INTERCEPT Blood System. Such questions and concerns may impair our ability to market and sell the INTERCEPT Blood System.
Several companies have, or are developing, technologies that are, or in the future may be, the basis for products that will directly compete with or reduce the market for our pathogen inactivation systems. A number of companies are specifically focusing on alternative strategies for pathogen inactivation in platelets and plasma. These alternative strategies may be more effective in inactivating certain types of pathogens from blood products, including non-lipid-enveloped pathogens, such as hepatitis A virus, which our products have not demonstrated an ability to inactivate, or human parvovirus B-19, for which our products have not demonstrated a high level of inactivation. While our products can effectively inactivate a broad spectrum of pathogens in blood components, including more robust inactivation of many pathogens than has been shown by other companies, market acceptance of our products may be reduced if customers determine that competitors products inactivate a broader range of pathogens that are of particular interest to the transfusion medicine community. In addition, customers and prospective customers may believe that our competitors products are safer or more cost effective than INTERCEPT Blood System products. In Europe, several companies, including Grifols S.A., Octapharma AG and MacoPharma International, are developing or selling commercial pathogen inactivation systems or services to treat fresh frozen plasma. CaridianBCT is developing a pathogen inactivation system for blood products and has been issued CE marks for a pathogen reduction system for both platelets and plasma. We understand that CaridianBCT has also conducted a clinical trial on a pathogen inactivation system for whole blood. CaridianBCTs product candidate, if successful, may offer competitive advantages over our INTERCEPT Blood System. We understand CaridianBCT was recently acquired by Terumo Corporation, a large Japanese-based, multinational corporation with more mature products and relationships than we have. Our ability to commercialize our products in certain markets, particularly Japan, may be negatively affected by Terumos resources and their pre-existing relationships with regulators and customers. Other companies developing competing products may also offer and sell other blood-banking products and services. As a result, competitors may have pre-existing long-term relationships with customers and may be able to offer synergies for both pathogen inactivation and non-pathogen inactivation products that we are unable to offer.
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New methods of testing whole blood for specific pathogens have been approved by the FDA and in Europe, as have tests for bacteria in platelets. Other companies are marketing rapid, point-of-care bacterial tests, and developing synthetic blood product substitutes and products to stimulate the growth of platelets. Development and commercialization of any of these or other related technologies could limit the potential market for our products.
We may be liable and we may need to withdraw our products from the market if our products harm people. We may be liable if an accident occurs in our controlled use of hazardous materials. Our insurance coverage may be inadequate to offset losses we may incur.
We are exposed to potential liability risks inherent in the testing and marketing of medical devices and pharmaceutical products. We may be liable if any of our products cause injury, illness or death. Although we will have completed rigorous preclinical and clinical safety testing prior to marketing our products, there may be harmful effects caused by our products that we are unable to identify in preclinical or clinical testing. In particular, unforeseen, rare reactions or adverse side effects related to long-term use of our products may not be observed until the products are in widespread commercial use. Because of the limited duration and number of patients receiving blood components treated with the INTERCEPT Blood System products in clinical trials, it is possible that harmful effects of our products not observed in clinical and preclinical testing could be discovered after a marketing approval has been received. For example, in cases where we have obtained regulatory approval for our products, we have demonstrated pathogen inactivation to specified levels based on well-established tests. However, there is no way to determine, after treatment by our products, whether our products have completely inactivated all of the pathogens that may be present in blood components. There is also no way to determine whether any residual amount of a pathogen remains in the blood component treated by our products, and there is no way to exclude that such residual amount would be enough to cause disease in the transfused patient. For ethical reasons, we cannot conduct human testing to determine whether an individual who receives a transfusion of a blood component containing a pathogen that was inactivated using the INTERCEPT Blood System might show positive results if tested for an antibody against that pathogen. While we believe, based on the clinical experience of our scientists, that the level of inactivated pathogens would likely be too small to induce a detectable antibody response in diagnostic tests, we cannot exclude that a transfused patient might show positive results if tested for an antibody against that pathogen. We could be subject to a claim from a patient that tests positive, even though that patient did not contract a disease. Later discovery of problems with a product, manufacturer or facility may result in additional restrictions on the product or manufacturer, including withdrawal of the product from the market. We are subject to risks and costs of product recall, which include not only potential out-of-pocket costs, but also potential interruption to our supply chain. In such an event, our customer relations would be harmed and we would incur unforeseen losses.
We maintain product liability insurance, but do not know whether the insurance will provide adequate coverage against potential liabilities. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products.
Our research and development activities involve the controlled use of hazardous materials, including certain hazardous chemicals, radioactive materials and infectious pathogens, such as HIV and hepatitis viruses. Although we believe that our safety procedures for handling and disposing of hazardous materials are adequate and comply with regulatory requirements, we cannot eliminate the risk of accidental contamination or injury. If an accident occurs, we could be held liable for any damages that result.
If we fail to obtain the capital necessary to fund our future operations or if we are unable to generate positive cash flows from our operations, we will need to curtail planned development or sales and commercialization activities.
Our near-term capital requirements are dependent on various factors, including operating costs and working capital investments associated with commercializing the INTERCEPT Blood System, costs associated with planning and conducting studies and clinical development of our red blood cell system, costs associated with pursuing regulatory approval in geographies where we do not currently sell the INTERCEPT Blood System, timing and magnitude of payments under grants from the United States government, and costs related to creating, maintaining and defending our intellectual property. Our long-term capital requirements will also be dependent on competitive developments and regulatory factors. Until we are able to generate a sufficient amount of product revenue and generate positive net cash flows from operations, meeting our long-term capital requirements is in large part subject to access to public and private equity and debt capital markets, as well as to additional collaborative arrangements with partners or government grants, augmented by cash generated from operations and interest income earned on the investment of our cash balances and short-term investments. We believe that cash received from product sales and government grants, our available cash balances, and access to debt will be sufficient to meet our capital requirements for at least the next twelve months. If our assumptions prove to be incorrect, we could consume our available capital resources sooner than we currently expect.
We have borrowed and in the future may borrow capital from institutional and commercial banking sources. Potential borrowings may include restrictive covenants, including covenants that restrict the operation of our business, liens on assets, high effective interest rates and repayment provisions that reduce cash resources and limit future access to capital markets. To the extent
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that we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. To the extent that we raise additional funds through collaboration or partnering arrangements, we may be required to relinquish some of our rights to product revenues, our technologies or rights to market and sell our products in certain geographies, or grant licenses on terms that are not favorable to us.
The disruptions to the global credit and financial markets and general economic uncertainty has generally made equity and debt financing more difficult to obtain and the terms less favorable to the companies seeking to raise financing. As a result of these and other factors, we do not know whether additional capital will be available when needed, or that, if available, we will be able to obtain additional capital on reasonable terms. If we are unable to raise additional capital due to disruptions to the global credit and financial markets and general economic uncertainty or other factors, we may need to curtail planned development or commercialization activities.
Historically, we have received significant awards in funding under cooperative agreements with the DoD for the INTERCEPT Blood System. Access to federal grants and cooperative agreements is subject to the authorization of funds and approval of our research plans by various organizations within the federal government, including the United States Congress. The general economic environment, coupled with tight federal budgets, has led to a general decline in the amount available for government funding. While we expect to continue to occasionally receive grants from the DoD, we cannot assure you that further funding will be awarded to use in the future under federal grants and cooperative agreements for the INTERCEPT Blood System. If we are unable to obtain further funding for federal grants and cooperative agreements for the continued development of the INTERCEPT Blood System in the United States at levels similar to past funding, we may need to reduce our operating expenses, which would delay progress in some of our development programs.
We have only a limited operating history, and we expect to continue to generate losses.
We may never achieve a profitable level of operations. Our development and selling, general, and administrative expenses have resulted in substantial losses each year since our inception with the exception of the year ended December 31, 2005. The platelet and plasma systems are not yet approved in the United States or in many other countries around the world. The red blood cell system is in clinical development and may never emerge from the clinical development stage as a marketed product. We may be required to reduce the sales price for our products in order to make our products economically attractive to our customers and to governmental and private payors, which may reduce or altogether eliminate our gross profit on sales. At our present sales levels of the platelet and plasma systems, our costs to manufacture, distribute, market, sell, support and administer the systems are in excess of revenue. Contribution from product sales is unlikely to exceed the costs we incur in research, development, and commercialization of the INTERCEPT Blood System for near-term. We expect our losses to continue at least until the INTERCEPT Blood System achieves more significant market acceptance. To the extent that we reach agreement on a clinical pathway with the FDA for our platelet or plasma products and if we choose to pursue such opportunities, we would expect to incur substantial costs which could extend the period during which we expect to operate at a loss.
We have issued debt containing certain covenants that we may be unable to comply with. Our operations may not provide sufficient cash to meet the repayment obligations of the note.
In September 2011, we entered into a loan and security agreement, or Credit Agreement, for $10.0 million, of which we immediately borrowed $5.0 million. The Credit Agreement is secured by all our current and future assets, except for intellectual property and 35% of our investment in our subsidiary, Cerus Europe B.V. The Credit Agreement requires that we comply with certain customary and routine covenants, including the requirement to maintain a minimum cash balance of $2.5 million and achieve minimum revenue levels, which will be measured monthly based on a six-month trailing basis and must be at least 75% of the pre-established future projected revenues for the six-month period. If we are unable to increase our revenues to comply with the covenants in the Credit Agreement, the lender may call the note which would require us to repay the principal of the note sooner than we have anticipated. In the event that the note was called due to non-compliance with the covenants, we may be unable to pay back the principal, which would allow the lender to liquidate collateralized assets. This in turn, would harm our business.
In addition, our operations may not reach the levels needed to meet the scheduled repayment obligations of the note. If we are unable to meet the scheduled repayment obligations of the note using our available cash, we may be forced to liquidate other assets, refinance the notes or issue equity securities to raise the necessary cash to meet our obligations. There is no assurance that we would be able to sufficiently or timely liquidate assets to meet the notes repayment obligations or that we would be able to refinance the notes or issue equity, in which case our business would be significantly harmed and may force us into bankruptcy.
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Virtually all of our research and development activities and the significant majority of our general and administrative activities are performed in or managed from a single site that may be subject to lengthy business interruption in the event of a severe earthquake. We also may suffer loss of computerized information and may be unable to make timely filings with regulatory agencies in the event of catastrophic failure of our data storage and backup systems.
Virtually all of our research and development activities and the significant majority of our general and administrative activities are performed in or managed from our facilities in Concord, California, which are within an active earthquake fault zone. Should a severe earthquake occur, we might be unable to occupy our facilities or conduct research and development and general and administrative activities in support of our business and products until such time as our facilities could be repaired and made operational. Our property and casualty and business interruption insurance in general does not cover losses caused by earthquakes. While we have taken certain measures to protect our scientific, technological and commercial assets, a lengthy or costly disruption due to an earthquake would have a material adverse effect on us. We have also taken measures to limit damage that may occur from the loss of computerized data due to power outage, system or component failure, or corruption of data files. However, we may lose critical computerized data, which may be difficult or impossible to recreate, which may harm our business. We may be unable to make timely filings with regulatory agencies in the event of catastrophic failure of our data storage and backup systems, which may subject us to fines or adverse consequences, up to and including loss of our abilities to conduct business.
We may not be able to protect our intellectual property or operate our business without infringing intellectual property rights of others.
Our commercial success will depend, in part, on obtaining and maintaining patent protection on our products and successfully defending our products against third-party challenges. Our technology will be protected from unauthorized use only to the extent that it is covered by valid and enforceable patents or effectively maintained as trade secrets. As a result, our success depends in part on our ability to:
| obtain patents; |
| protect trade secrets; |
| operate without infringing upon the proprietary rights of others; and |
| prevent others from infringing on our proprietary rights. |
We cannot be certain that our patents or patents that we license from others will be enforceable and afford protection against competitors. Our patents or patent applications, if issued, may be challenged, invalidated or circumvented. Our patent rights may not provide us with proprietary protection or competitive advantages against competitors with similar technologies. Others may independently develop technologies similar to ours or independently duplicate our technologies. For example, a United States patent issued to a third-party covers methods to remove psoralen compounds from blood products. We have reviewed the patent and believe there exists substantial questions concerning its validity. We cannot be certain, however, that a court would hold the patent to be invalid or not infringed by our platelet or plasma systems, if and when those products are sold in the United States. Our key patents generally expire at various dates between 2012 and 2027. Recent patent applications will, if granted, result in patents with later expiration dates. In addition, we have a license from Fenwal to United States and foreign patents relating to the INTERCEPT Blood System, which expire from 2017 to 2024. Due to the extensive time required for development, testing and regulatory review of our potential products, our patents may expire or remain in existence for only a short period following commercialization. This would reduce or eliminate any advantage of the patents.
We cannot be certain that we were the first to make the inventions covered by each of our issued patents or pending patent applications or that we were the first to file patent applications for such inventions. We may need to license the right to use third-party patents and intellectual property to continue development and commercialization of our products. We may not be able to acquire such required licenses on acceptable terms, if at all. If we do not obtain such licenses, we may need to design around other parties patents, or we may not be able to proceed with the development, manufacture or sale of our products.
Our patents do not cover all of the countries in which we are selling, and planning to sell, our products. We will not be able to prevent potential competitors from using our technology in countries where we do not have patent coverage.
We may face litigation to defend against claims of infringement, assert claims of infringement, enforce our patents, protect our trade secrets or know-how or determine the scope and validity of others proprietary rights. Patent litigation is costly. In addition, we may require interference proceedings before the United States Patent and Trademark Office to determine the priority of inventions relating to our patent applications. Litigation or interference proceedings could be expensive and time consuming, and we could be unsuccessful in our efforts to enforce our intellectual property rights.
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We may rely, in certain circumstances, on trade secrets to protect our technology. However, trade secrets are difficult to protect. We protect our proprietary technology and processes, in part, by confidentiality agreements with employees and certain contractors. These agreements may be breached and we may not have adequate remedies for any breach or our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others, disputes also may arise as to the rights in related or resulting know-how and inventions.
As our international operations grow, we may be subject to adverse fluctuations in exchange rates between the United States dollar and foreign currencies. Consequently, we may suffer losses.
Our international operations are subject to risks typical of an international business, including, among other factors: differing political, economic, and regulatory climates, different tax structures, and foreign exchange volatility. We do not currently enter into any hedging contracts to normalize the impact of foreign exchange fluctuations. As a result, our future results could be materially affected by changes in these or other factors.
Product sales of our blood safety products are typically made in Europe and generally are invoiced to customers in Euros. In addition, we purchase finished disposable kits for our platelet and plasma systems and incur certain operating expenses in Euros and other foreign currencies. Our exposure to foreign exchange rate volatility is a direct result of our product sales, cash collection and expenses to support our international operations. Foreign exchange rate fluctuations are recorded as a component of interest (expense) and other, net on our consolidated statements of operations. Significant fluctuations in the volatility of foreign currencies relative to the United States dollar may materially affect our results of operations. Currently we do not have any near-term plans to enter into a formal hedging program to mitigate the effects of foreign currency volatility.
The market price of our stock may be highly volatile.
The market prices for our securities and those of other emerging medical device and biotechnology companies have been, and may continue to be, volatile. For example, during the period from January 1, 2009 to September 30, 2011, the sale price of our common stock as quoted on the Nasdaq Global Market fluctuated within a range from a low of $0.59 to a high of $4.01. Announcements may have a significant impact on the market price of our common stock. Such announcements may include:
| decisions regarding reimbursement and commercial adoption by customers, national blood services or governmental bodies; |
| biological or medical discoveries; |
| technological innovations discovered or new commercial services offered by us or our competitors; |
| developments concerning proprietary rights, including patents and litigation matters; |
| regulatory developments; |
| status of development partnerships; |
| dilution from future issuances of common stock, including common stock issued pursuant to the Sales Agreement, through the exercise of warrants and vested stock options; |
| debt financings, with terms that may not be viewed favorably by stockholders; |
| public concern as to the safety of new technologies; |
| general market conditions; |
| comments made by analysts, including changes in analysts estimates of our financial performance; and |
| quarterly fluctuations in our revenue and financial results. |
We may fail to comply fully with elements of the Sarbanes-Oxley Act of 2002. Our failure to maintain effective internal controls in accordance with Section 404 of this Act could have a material adverse effect on our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accountants attesting to the effectiveness of our internal controls. These requirements extend to the operations of our subsidiary in Europe. If we fail to maintain the adequacy of our internal controls over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude in future periods that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. If we cannot favorably assess, or our independent registered public accountants are unable to provide an unqualified attestation report on the effectiveness of our internal controls over financial reporting, investor confidence in the reliability of our financial reports may be adversely affected, which could have a material adverse effect on our stock price.
46
Provisions of our charter documents, our stockholder rights plan and Delaware law could make it more difficult for a third party to acquire us, even if the offer may be considered beneficial by our stockholders.
Provisions of the Delaware General Corporation Law could discourage potential acquisition proposals and could delay, deter or prevent a change in control. The anti-takeover provisions of the Delaware General Corporation Law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. In addition, Section 203 of the Delaware General Corporation Law, unless its application has been waived, provides certain default anti-takeover protections in connection with transactions between the company and an interested stockholder of the company. Generally, Section 203 prohibits stockholders who, alone or together with their affiliates and associates, own more than 15% of the subject company from engaging in certain business combinations for a period of three years following the date that the stockholder became an interested stockholder of such subject company without approval of the board or the vote of two-thirds of the shares held by the independent stockholders. Our board of directors has also adopted a stockholder rights plan, or poison pill, which would significantly dilute the ownership of a hostile acquirer. Additionally, provisions of our amended and restated certificate of incorporation and bylaws could deter, delay or prevent a third party from acquiring us, even if doing so would benefit our stockholders, including without limitation, the authority of the board of directors to issue, without stockholder approval, preferred stock with such terms as the board of directors may determine.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | REMOVED AND RESERVED |
ITEM 5. | OTHER INFORMATION |
None.
47
ITEM 6. | EXHIBITS |
3.1(1) | Amended and Restated Certificate of Incorporation of Cerus Corporation. | |
3.2(2) | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Cerus Corporation. | |
3.3(3) | Amended and Restated Bylaws of Cerus Corporation. | |
4.2(4) | Specimen Stock Certificate. | |
4.3(5) | Rights Agreement, dated as of November 3, 1999, as amended as of August 6, 2001, between Cerus Corporation and Wells Fargo Bank, N.A. (formerly known as Norwest Bank Minnesota, N.A.). | |
4.4(6) | Amendment to Rights Agreement, dated as of October 28, 2009, between Cerus Corporation and Wells Fargo Bank, N.A. (which includes the form of Rights Certificate as Exhibit B thereto). | |
4.5(7) | Form of Registered Direct Common Warrant. | |
4.6(8) | Form of Warrant to Purchase Common Stock. | |
10.1(9) | Amended and Restated Supply Agreement, dated as of September 1, 2011, between Cerus Corporation and Ash Stevens Inc. | |
10.2(9) | Loan and Security Agreement, dated as of September 30, 2011, by and between Cerus Corporation and Comerica Bank. | |
31.1(9) | Certification of the Principal Executive Officer of Cerus Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2(9) | Certification of the Principal Financial Officer of Cerus Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1(9)(*) | Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS(10) | XBRL Instance Document | |
101.SCH(10) | XBRL Taxonomy Extension Schema Document | |
101.CAL(10) | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB(10) | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE(10) | XBRL Taxonomy Extension Presentation Linkbase Document |
(1) | Incorporated by reference to Cerus Current Report on Form 8-K (No. 333-72185), filed with the SEC on November 12, 1999. |
(2) | Incorporated by reference to Cerus Quarterly Report on Form 10-Q (File No. 000-21937) for the quarter ended June 30, 2010. |
(3) | Incorporated by reference to Cerus Current Report on Form 8-K (File No. 000-21937), filed with the SEC on June 19, 2008. |
(4) | Incorporated by reference to Cerus Registration Statement on Form S-1 (File No. 333-11341) and amendments thereto. |
(5) | Incorporated by reference to Cerus Quarterly Report on form 10-Q (File No. 000-21937), for the quarter ended June 30, 2009. |
(6) | Incorporated by reference to Cerus Current Report on Form 8-K (File No. 000-21937), filed with the SEC on October 30, 2009. |
(7) | Incorporated by reference to Cerus Current Report on Form 8-K (File No. 000-21937), filed with the SEC on August 20, 2009. |
(8) | Incorporated by reference to Cerus Current Report on Form 8-K (File No. 000-21937), filed with the SEC on November 12, 2010. |
(9) | Filed herewith. |
(10) | Furnished herewith. Pursuant to applicable securities laws and regulations, Cerus Corporation is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as Cerus Corporation has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. These interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections. |
| Registrant has requested confidential treatment for portions of this exhibit. |
(*) | This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission, and is not incorporated by reference into any filing of Cerus Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing. |
48
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CERUS CORPORATION | ||||||
Date: November 3, 2011 | /s/ Kevin D. Green | |||||
Kevin D. Green | ||||||
Chief Accounting Officer (on behalf of registrant and as Principal Financial Officer) | ||||||
49
EXHIBIT INDEX
3.1(1) | Amended and Restated Certificate of Incorporation of Cerus Corporation. | |
3.2(2) | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Cerus Corporation. | |
3.3(3) | Amended and Restated Bylaws of Cerus Corporation. | |
4.2(4) | Specimen Stock Certificate. | |
4.3(5) | Rights Agreement, dated as of November 3, 1999, as amended as of August 6, 2001, between Cerus Corporation and Wells Fargo Bank, N.A. (formerly known as Norwest Bank Minnesota, N.A.). | |
4.4(6) | Amendment to Rights Agreement, dated as of October 28, 2009, between Cerus Corporation and Wells Fargo Bank, N.A. (which includes the form of Rights Certificate as Exhibit B thereto). | |
4.5(7) | Form of Registered Direct Common Warrant. | |
4.6(8) | Form of Warrant to Purchase Common Stock. | |
10.1(9) | Amended and Restated Supply Agreement, dated as of September 1, 2011, between Cerus Corporation and Ash Stevens Inc. | |
10.2(9) | Loan and Security Agreement, dated as of September 30, 2011, by and between Cerus Corporation and Comerica Bank. | |
31.1(9) | Certification of the Principal Executive Officer of Cerus Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2(9) | Certification of the Principal Financial Officer of Cerus Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1(9)(*) | Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS(10) | XBRL Instance Document | |
101.SCH(10) | XBRL Taxonomy Extension Schema Document | |
101.CAL(10) | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB(10) | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE(10) | XBRL Taxonomy Extension Presentation Linkbase Document |
(1) | Incorporated by reference to Cerus Current Report on Form 8-K (No. 333-72185), filed with the SEC on November 12, 1999. |
(2) | Incorporated by reference to Cerus Quarterly Report on Form 10-Q (File No. 000-21937) for the quarter ended June 30, 2010. |
(3) | Incorporated by reference to Cerus Current Report on Form 8-K (File No. 000-21937), filed with the SEC on June 19, 2008. |
(4) | Incorporated by reference to Cerus Registration Statement on Form S-1 (File No. 333-11341) and amendments thereto. |
(5) | Incorporated by reference to Cerus Quarterly Report on form 10-Q (File No. 000-21937), for the quarter ended June 30, 2009. |
(6) | Incorporated by reference to Cerus Current Report on Form 8-K (File No. 000-21937), filed with the SEC on October 30, 2009. |
(7) | Incorporated by reference to Cerus Current Report on Form 8-K (File No. 000-21937), filed with the SEC on August 20, 2009. |
(8) | Incorporated by reference to Cerus Current Report on Form 8-K (File No. 000-21937), filed with the SEC on November 12, 2010. |
(9) | Filed herewith. |
(10) | Furnished herewith. Pursuant to applicable securities laws and regulations, Cerus Corporation is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as Cerus Corporation has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. These interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections. |
| Registrant has requested confidential treatment for portions of this exhibit. |
(*) | This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission, and is not incorporated by reference into any filing of Cerus Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing. |
50
Exhibit 10.1
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
SUPPLY AGREEMENT
AMENDED AND RESTATED
BETWEEN
ASH STEVENS INC.
AND
CERUS CORPORATION
TABLE OF CONTENTS
SEC. |
PAGE | |||
1. | PURCHASES AND DELIVERY | 2 | ||
2. | PRODUCT FORECAST; RAW MATERIALS; INVENTORY; MAINTENANCE FEES | 3 | ||
3. | STABILITY STUDIES; REFERENCE STANDARDS; OTHER SERVICES | 4 | ||
4. | TRANSFER OF OWNERSHIP; SHIPMENT OF PRODUCTS | 4 | ||
5. | TERMINATION | 5 | ||
6. | GUARANTEE | 5 | ||
7. | WARRANTIES AND INDEMNIFICATIONS | 5 | ||
8. | CONFIDENTIAL INFORMATION | 7 | ||
9. | INTELLECTUAL PROPERTY | 8 | ||
10. | COMPLIANCE WITH LAW | 8 | ||
11. | OTHER PROVISIONS | 9 |
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
TABLE OF EXHIBITS
CROSS REFERENCE |
EXHIBIT | PAGE | ||||
SUMMARY | A | QUALITY AGREEMENT | A-1 | |||
SUMMARY | B | SPECIFICATIONS | B-1 | |||
SUMMARY | C | PRICING | C-1 |
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
AMENDED AND RESTATED SUPPLY AGREEMENT
This Amended and Restated Supply Agreement (the Supply Agreement) is effective on the date of the last signature hereto (Effective Date), by and between ASH STEVENS INC., a Michigan corporation with its principal place of business at 5861 John C. Lodge Freeway, Detroit, Michigan 48202-3398 (Ash Stevens); and CERUS CORPORATION, a Delaware corporation with its principal place of business at 2550 Stanwell Drive, Concord, California 94520 (Cerus). Ash Stevens and Cerus are each individually referred to in this Supply Agreement as a Party and, collectively, as the Parties.
This Supply Agreement amends and restates the Supply Agreement entered into between Ash Stevens and Cerus, effective November 14, 2002.
Ash Stevens agrees to manufacture Cerus proprietary S-59 compound (also known as Amotosalen and referred to in this Supply Agreement as Product or Products) in accordance with the terms and conditions of the Quality Agreement entered concurrently with this Supply Agreement and incorporated by reference herein in the attached Exhibit A (the Quality Agreement), and Product specifications set forth in Exhibit B attached hereto (the Specifications). Products will be manufactured and stored at Ash Stevens facilities located at, 18655 Krause Street, Riverview, Michigan 48193. Cerus desires to purchase Products for use or for inclusion in systems for resale by Cerus and/or its affiliates, distributors and licensees (the Systems).
Ash Stevens acknowledges that all intellectual property relating to the Products is the property of Cerus.
Prices of the Products are:
See EXHIBIT C.
Payment with respect to such Product shall be due [ * ] after receipt by Cerus of the invoice with respect thereto; provided that if Cerus rejects such Product pursuant to Section 7, then payment shall be due within [ * ] after receipt by Cerus of both the replacement Product and Certificate of Analysis therefor (assumes pre-delivery approval of Product sample). Cerus will provide information on shipping address at the time of purchase. The bill to address shall be Cerus Corporation, 2550 Stanwell Dr., Concord, CA 94520, unless otherwise noted at the time of issuance of an Order (as further defined below in Section 1 of this Supply Agreement).
This Supply Agreement will have an initial term (the Initial Term) which will run from the Effective Date until December 31st, 2015, unless earlier terminated by either Party pursuant to the provisions of this Supply Agreement.
Either Party may terminate this Supply Agreement without cause at the end of the Initial Term by providing written notice of termination at least one (1) year in advance of the effective termination date for a notice given to Ash Stevens, and two (2) years in advance of the effective
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
termination date for a notice given to Cerus (each a Notice of Termination). The Initial Term of the Supply Agreement shall be automatically extended for successive extension periods of two (2) years each (the Automatic Extension Period(s)), unless either Party provides the above-described Notice of Termination before the termination date of the Initial Term or the then-effective Automatic Extension Period, or unless the Supply Agreement is otherwise terminated pursuant to the provisions of this Supply Agreement. The Initial Term and Automatic Extension Periods are collectively referred to herein as the Term.
Upon termination of this Supply Agreement, the provisions of Sections 6-10 of the Terms and Conditions shall remain in effect in accordance with their terms.
TERMS AND CONDITIONS
1. PURCHASES AND DELIVERY
(a) Subject to paragraph (b), Ash Stevens shall sell Products to Cerus, and Cerus shall purchase from Ash Stevens Products for use or resale at Cerus discretion anywhere in the world (also referred to hereinafter as Territory). Cerus will order Products from Ash Stevens by placing purchase orders during the Term of this Supply Agreement (Orders). Ash Stevens shall acknowledge promptly each Cerus Order in writing and confirm delivery dates to destinations specified by Cerus. As time is of the essence in meeting Cerus requirements for Product, Ash Stevens shall ship Product in time to comply with Cerus required delivery dates as specified in the Purchase Order, provided that the earliest such date provides a lead-time of at least [ * ] to produce the Products after receipt of starting materials by Ash Stevens. Ash Stevens is required to maintain a supply of starting materials, as provided in Section 2, below. All sales of Products shall be subject to the terms and conditions of this Supply Agreement and, to the extent they specify quantities, destinations and delivery dates, to Cerus Orders. This Supply Agreement shall not be subject to the terms, conditions or provisions of any confirmation or business form of Ash Stevens or, except as provided in the immediately preceding sentence, Cerus Orders. Ash Stevens shall not be liable for failure or delay in filling Cerus Orders because of any cause such as strikes, wars and Acts of God beyond the control of and occurring without the fault of Ash Stevens; provided, however, that Ash Stevens shall notify Cerus promptly of anticipated delays and shall use all reasonable efforts to fill such Orders as soon as possible. Without limiting its other available remedies, Cerus may cancel any Order, in whole or in part, which is delayed more than [ * ].
(b) Nothing in this Supply Agreement will obligate Cerus to commence manufacture of Systems incorporating Products or continue manufacture once production has commenced. If Cerus discontinues manufacture of Systems incorporating the Products, it shall be required to purchase and pay Ash Stevens for orders that have been placed and for the fulfillment of which Ash Stevens has made substantial preparations at the agreed pricing, prorated to the extent of completion of such orders at the time of discontinuation.
2. PRODUCT FORECAST; RAW MATERIALS; INVENTORY; MAINTENANCE FEES
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(a) Forecast. By [ * ] of each calendar year, Cerus shall provide Ash Stevens with an annual delivery forecast estimating the quantity of Compound Cerus anticipates that it will purchase from Ash Stevens for such calendar year (the Annual Forecast). At such time Products are being ordered on [ * ] basis or more than [ * ] are being produced per year, Cerus shall provide Ash Stevens with a [ * ] rolling, delivery forecast estimating the quantity of Compound Cerus anticipates that it will purchase from Ash Stevens in the periods specified (the Rolling Forecast). Cerus shall update the Rolling Forecast every [ * ]; and inform Ash Stevens as soon as possible if Cerus reasonably expects that Orders for Compound would vary significantly (more than [ * ]) from the Rolling Forecast. In any event, however, Cerus shall place firm orders for the quantities shown in the most recent [ * ] Rolling Forecast.
(b) Changes. Cerus will place purchase orders to Ash Stevens for the manufacture of Product. If Cerus subsequently cancels or modifies a purchase order for any reason, Cerus shall be required to pay Ash Stevens a pro-rated amount based on the extent of completion of the order at the time of the cancellation or modification. Upon receipt of such notification by Cerus, Ash Stevens shall promptly provide Cerus with an invoice outlining the expenses incurred up to that date for the manufacture of Product. Payment terms and lead times are respectively described in the Preamble and paragraph (a) of Section 1 of this Supply Agreement.
(c) Starting Materials. Ash Stevens will use its best efforts at all times to maintain [ * ] supply of starting materials for the Product. Ash Stevens will provide Cerus with an itemization of the quantity of such materials maintained upon request and will promptly notify Cerus in the event of any difficulty, or anticipated difficulty, in obtaining any starting material. In the event of any termination of this Supply Agreement by Cerus, other than for breach by Ash Stevens, Cerus will be required to purchase at [ * ] cost any unexpired starting materials that are dedicated to the Products up to a maximum of [ * ]. Cerus shall also have the right to purchase any starting materials at [ * ] cost in the event of termination of this Supply Agreement for any reason other than breach by Cerus of this Supply Agreement.
(d) Storage. Ash Stevens will store up to [ * ] of finished Product inventory without any storage charge or carrying charge to Cerus. Upon request, Ash Stevens will provide Cerus with an update of the quantity of such inventory maintained. If Cerus requires storage of greater quantities, Ash Stevens may charge Cerus a reasonable storage charge. Such inventory will be stored at Ash Stevens Riverview Michigan GMP warehouse; this facility must be suited for storage of the Product and shall be subject to Cerus inspection and approval. Ash Stevens must notify Cerus of any changes in storage location or storage conditions for the Product. Ash Stevens will provide to Cerus upon the Effective Date of this Supply Agreement, and each anniversary date thereof, a certificate of all-risk insurance in the amount of at least [ * ], naming Cerus as an additional insured as its interests may appear. Ash Stevens shall maintain an inventory of Product primary reference standard and provide same to Cerus contractors upon request.
(e) Security Interest. Ash Stevens hereby grants Cerus a security interest in all finished Product inventory and work-in-process and in all starting materials and other property used in the production of Products to secure the performance of Ash Stevens obligations under
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
this Supply Agreement. Ash Stevens agrees to execute appropriate UCC financing statements and other documents necessary or appropriate to evidence or perfect this security interest.
(f) Samples At Cerus request, Ash Stevens will pre-ship a sample of Product from each lot to Cerus (or at Cerus direction, to Cerus designee) upon completion of that lot. Each sample will be accompanied by a Certificate of Analysis for the sample.
(g) Maintenance Fee. If Cerus has ordered, by December 31 of any calendar year, less than [ * ] of product for such calendar year, Cerus will pay Ash Stevens, a maintenance fee, as follows:
If the Amount Ordered is: |
Maintenance Fee | |
Less than [ * ] but more than [ * ] |
[ * ] | |
Less than [ * ] but more than [ * ] |
[ * ] | |
Less than [ * ] but more than [ * ] |
[ * ] | |
Less than [ * ] but more than [ * ] |
[ * ] | |
Less than [ * ] |
[ * ] |
The maintenance fee is in consideration of Ash Stevens continuous support for the Product.
3. STABILITY STUDIES; REFERENCE STANDARDS; OTHER SERVICES
Ash Stevens agrees to conduct stability studies on finished Products, [ * ] in accordance with a protocol approved by Cerus. Ash Stevens agrees to qualify and maintain an inventory of Product primary reference standard and to provide same to Cerus contractors upon request. From time to time, Cerus may make requests for other services that are beyond the scope of routine manufacture, including, but not limited to, Product change (as further detailed in the Quality Agreement). For each of the above, the scope of work, pricing, and terms, will be outlined in an amendment to this contract or in a work order, each deemed to be incorporated into this Supply Agreement and governed by its terms and conditions. For avoidance of doubt, a work order shall mean a written, signed order for the performance by Ash Stevens of mutually-agreed services.
4. TRANSFER OF OWNERSHIP; SHIPMENT OF PRODUCTS
Title and ownership to Products shall pass to Cerus at the time of their release as finished Products by Ash Stevens, whether or not such Products are being immediately shipped to Cerus or further stored as inventory by Ash Stevens, pursuant to paragraphs (c) and/or (d) of Section 2 of this Supply Agreement. Ash Stevens shall ship the Products to destinations specified by Cerus by mutually agreed upon carriers. Unless otherwise agreed to in writing, Cerus shall pay all normal freight charges. Ash Stevens shall include a packing list in each shipment of the Products providing the following information: (i) Cerus Purchase Order No.; (ii) Cerus Product Code; (iii) Quantity; (iv) Ash Stevens Lot Number and (v) Certificate of Analysis. Ash Stevens shall also fax a copy of each packing list to the destination and to Cerus (to the
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
address specified by Cerus, which may be different from the destination) for each shipment at the time of shipment. Ash Stevens will also include a material safety data sheet (MSDS) in each shipment. Detailed requirements and procedures relating to packaging and shipment of Product should be included in the Master Batch Records (as further defined in the Quality Agreement) collected and maintained by Ash Stevens with respect to the Product.
5. TERMINATION
Either Cerus or Ash Stevens may terminate this Supply Agreement for any material breach by the other Party [ * ] after written notice containing details of the breach if the breach remains uncured at the end of the notice period. Either Party may terminate this Supply Agreement effective immediately with written notice if the other Party shall file for bankruptcy, shall be adjudicated bankrupt, shall take advantage of applicable insolvency laws, shall make an assignment for the benefit of creditors, shall be dissolved or shall have a receiver appointed for its property. Cerus shall have the right to terminate this Supply Agreement immediately if Ash Stevens breaches its warranties contained in Section 7 or its guarantee contained in Section 6 under this Supply Agreement. If this Supply Agreement is terminated due to breach by Ash Stevens, such termination will not relieve Ash Stevens of its obligation to deliver Products ordered by Cerus prior to receipt of written notice of such termination, except to the extent Cerus cancels such Orders.
6. GUARANTEE
All Products sold to Cerus are hereby guaranteed by Ash Stevens, as of the date of their receipt by Cerus or its designee , to meet the Specifications and requirements specified by Cerus under this Supply Agreement, and, to be, on such date, not adulterated or misbranded within the meaning of the United States Federal Food, Drug and Cosmetic Act (the Act), or amendments thereto, and any similar federal, state or local laws or regulations, and not an article which may not, under the provisions of the Act, be introduced into interstate commerce.
7. WARRANTIES AND INDEMNIFICATIONS
(a) ASH STEVENS WARRANTS THAT IT POSSESSES GOOD AND MARKETABLE TITLE TO THE PRODUCTS SOLD TO CERUS UNDER THIS SUPPLY AGREEMENT AND THAT SUCH PRODUCTS ARE FREE FROM DEFECTS IN MANUFACTURE, WORKMANSHIP AND MATERIALS, AND ARE IN COMPLIANCE WITH THE SPECIFICATIONS REFERENCED IN EXHIBIT B. ALL IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE OR MERCHANTABILITY ARE EXPRESSLY DISCLAIMED. ASH STEVENS MAKES NO REPRESENTATION OR WARRANTY WITH REGARD TO THE SAFETY OR EFFICACY OF THE PRODUCT OR QUALIFICATION OF THE PRODUCT AS A PHARMACEUTICAL COMPOUND OR OF NON-INFRINGEMENT.
(b) Cerus will indemnify and hold harmless Ash Stevens and Ash Stevens suppliers against any and all claims, actions, causes of action, liabilities, losses, costs, damages or expenses (including reasonable attorneys fees) to the extent arising out of or in consequence of (1) Cerus negligence (including that of its suppliers) and/or misconduct or (2) [ * ], provided
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
that Cerus shall not be obligated to indemnify Ash Stevens from any liability to the extent caused by Ash Stevens or its suppliers negligence or misconduct.
(c) Ash Stevens will indemnify and hold harmless Cerus against any and all claims, actions, causes of action, liabilities, losses, costs, damages or expenses (including reasonable attorneys fees) to the extent arising out of or in consequence of (1) Ash Stevens negligence (including that of its suppliers) and/or misconduct or (2) [ * ], provided that Ash Stevens shall not be obligated to indemnify Cerus from any liability to the extent caused by Cerus negligence or misconduct.
(d) Each Party agrees to give the others prompt written notice of any claims made, including any claims asserted or made by any governmental authority, for which the other might be liable under the foregoing indemnification, together with the opportunity to defend, negotiate and settle such claims. Each Party will cooperate fully with the others in defending or otherwise resolving any such action, and each indemnified Party in any such action may at its option and expense be represented in such action. Neither Cerus nor Ash Stevens shall be responsible or bound by any compromise made by the other Party without their prior written consent, which shall not be unreasonably withheld.
EXCEPT AS OTHERWISE SET FORTH IN THIS SECTION 7 OF THIS SUPPLY AGREEMENT, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE MANUFACTURE, USE OR PERFORMANCE OF THE PRODUCTS.
(e) Ash Stevens shall obtain and keep in force during the Term of this Supply Agreement comprehensive liability insurance covering each occurrence of bodily injury (including death) and property damage in an amount of not less than [ * ], including:
(i) Blanket Contractual Liability; and
(ii) Blanket Broad Form Property Damage
The insurance policy shall be endorsed to name Cerus as additional insured and to provide for written notification to Cerus by the insurer not less than [ * ] prior to cancellation, expiration or modification. A certificate of insurance evidencing compliance with this Section and referencing this Supply Agreement shall be furnished to Cerus by Ash Stevens within [ * ] of this Supply Agreements Effective Date and on each anniversary date thereof.
8. CONFIDENTIAL INFORMATION
8.1. General. Each Party shall maintain in confidence all Confidential Information of the other Party, as defined in Section 8.2, and shall not use, disclose or grant use of such Confidential Information, except as expressly authorized by this Supply Agreement. A Party may disclose Confidential Information of the other Party to employees requiring access thereto for the purposes of this Supply Agreement, provided, however, that prior to making any such disclosures, each such employee shall be apprised of the duty and obligation to maintain
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
such Confidential Information in confidence and not to use such information for any purpose other than in accordance with the terms and conditions of this Supply Agreement. Each Party agrees to take all steps necessary to ensure that the Confidential Information received shall be maintained in confidence including such steps as it takes to prevent the disclosure of its own proprietary and confidential information of like character. Both Parties agree that this Supply Agreement shall be binding upon its affiliates, and upon the employees of such Party and its affiliates. Each Party shall take all steps necessary to ensure that its affiliates and employees will comply with the terms and conditions of this Supply Agreement.
8.2 Definitions. As used in this Supply Agreement, the term Confidential Information shall mean any information disclosed by either Party to the other Party in the performance of this Supply Agreement, whether in oral, written, graphic or electronic form. For the purposes of this Supply Agreement, Ash Stevens Confidential Information shall mean any and all standard operating procedures relating to the business of Ash Stevens. Cerus Confidential Information shall mean any and all data and information relating to, contained or embodied in, the INTERCEPT Blood System; S-59 (amotosalen); information regarding plans for research development, present and future products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers.
8.3 Exclusions. The term Confidential Information shall not be deemed to include information which: (i) is now, or hereafter becomes, through no act or failure to act on the part of the recipient Party, generally known or available; (ii) is known by the recipient Party at the time of receiving such information as evidenced by its records; (iii) is hereafter furnished to the recipient Party by a third party, as a matter of right and without restriction or disclosure; or (iv) is the subject or a written permission to disclose provided by the other Party.
8.4 Authorized Disclosures. Notwithstanding any other provision of this Supply Agreement, disclosure of Confidential Information shall not be precluded if such disclosure:
(a) is in response to a valid order of a court or other governmental body of the United States or any political subdivision thereof; provided, however, that the Party shall first have given notice to the other Party and shall have made a reasonable effort to obtain a protective order requiring that the Confidential Information so disclosed be used only for the purposes for which the order was issued;
(b) is otherwise required by law or regulation; provided that the disclosing Party shall first have given notice to the other and shall have made a reasonable effort to obtain a protective order requiring that the Confidential Information so disclosed be used only for the purposes for which the law or regulation required; or
(c) is otherwise necessary to establish rights or enforce obligations under this Supply Agreement, but only to the extent that any such disclosure is necessary.
9. INTELLECTUAL PROPERTY
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(a) Ash Stevens shall make prompt written disclosure to Cerus and hereby assigns to Cerus all right, title and interest in and to any inventions, methods, processes, developments, improvements, know-how or trade secrets which Ash Stevens, its employees or agents may solely or jointly conceive or reduce to practice in the course of or as a result of any development or change control relating to the commercialization of the Product (collectively the Intellectual Property). Without limiting the generality of the preceding sentence, it is understood and agreed by the Parties that any and all standard operating procedures relating to the business of Ash Stevens that are not specific to the INTERCEPT Blood System or Cerus shall be owned by Ash Stevens; and, that any and all data and information, relating to, contained or embodied in, the INTERCEPT Blood System and S-59 (amotosalen) shall be owned by Cerus.
(b) Ash Stevens will assist Cerus in obtaining and enforcing United States and foreign proprietary rights relating to any and all Intellectual Property. To that end Ash Stevens will execute, verify and deliver such documents and perform such other acts (including appearing as a witness) as Cerus may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such proprietary rights and the assignment thereof. In addition, Ash Stevens will execute, verify and deliver assignments of such proprietary rights to Cerus. Cerus shall compensate Ash Stevens at a reasonable rate for the time actually spent by Ash Stevens at Cerus request on such assistance.
(c) In the event Cerus is unable for any reason, after reasonable effort, to secure Ash Stevens signature on any document needed in connection with the actions specified in Section 9(b), Ash Stevens hereby irrevocably designates and appoints Cerus and its duly authorized officers and agents as its agent and attorney-in-fact, to act for and in its behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of Section 9(b) with the same legal force and effect as if executed by Ash Stevens.
(d) Ash Stevens agrees and acknowledges that it shall acquire no rights of any kind whatsoever with respect to any patents, copyrights, trademarks, trade secrets or other proprietary rights of Cerus as a result of Ash Stevens performance under this Supply Agreement or otherwise.
10. COMPLIANCE WITH LAW
The Parties represent that they are and will remain in compliance with all applicable laws, regulations and orders relating to the manufacture of the Products.
11. OTHER PROVISIONS
(a) This Supply Agreement, Addendums, amendments and work orders thereto, together with the provisions of the Quality Agreement that are incorporated by reference herein, contain the entire agreement between the Parties relating to the subject matter of this Supply Agreement and any other understandings between the Parties relating to the subject matter of this Supply Agreement are superseded by this Supply Agreement. None of the terms of this Supply Agreement shall be deemed to be waived or amended by either Party unless such a waiver
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
or amendment specifically references this Supply Agreement and is in writing signed by the Party to be bound.
(b) All notices and demands required or permitted to be given or made pursuant to this Supply Agreement shall be in writing and effective when personally given or when placed in an envelope and deposited in the United States mail postage prepaid, addressed as follows:
If to Cerus: |
If to Ash Stevens: | |
Cerus Corporation |
Ash Stevens Inc. | |
2550 Stanwell Drive |
861 John C. Lodge Freeway | |
Concord, CA 94520 |
Detroit, MI 48202-3398 | |
Attention: Vice President, Legal Affairs |
Attention: President |
or to such other address as to which either Party may notify the other.
(c) This Supply Agreement shall be binding upon and inure to the benefit of the Parties, their successors and assigns. This Supply Agreement shall be assignable: (i) by Cerus, in whole or in part, without the consent of Ash Stevens to any Affiliate of Cerus; (ii) by either Party with the written consent of the other; or (iii) by either Party without the consent of the other to the purchaser of substantially all the assets of its business to which this Supply Agreement relates. Any attempted assignment that does not comply with the terms of this Section shall be void.
(d) This Supply Agreement is deemed to have been executed in and shall be governed by and construed according to the laws of the State of Michigan, applicable to contracts made and to be performed in that State. If particular portions of this Supply Agreement are ruled unenforceable, such portions shall be deleted and all other terms and conditions of this Supply Agreement shall remain in full force and effect.
(e) Unless expressly approved in advance and in writing by Cerus, respectively, Ash Stevens shall make no reference to Cerus or to the subject matter of this Supply Agreement in any publicity, advertising or other public statements or documents either during or after the Term of this Supply Agreement. This shall not apply to such reference or disclosure required by law or governmental agency. Notwithstanding the foregoing, Ash Stevens shall be authorized to publicly disclose that it is a contract manufacturer to Cerus for the synthesis of the Product.
(f) The relationship of the Parties under this Supply Agreement shall be and at all times remains one of independent contractors. No Party is an employee, agent or legal representative of the other Party or shall have any authority to assume or create obligations on the other Partys behalf.
(g) Cerus or Cerus designee (with Cerus authorization) may audit upon reasonable notice Ash Stevens manufacturing (excluding confidential cost information) and quality books and records once per calendar year for the purpose of confirming compliance with the terms of this Supply Agreement.
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(h) Ash Stevens shall manufacture and supply Products exclusively for Cerus and Cerus designees pursuant to this Supply Agreement. Ash Stevens shall not during the Term and for a period of [ * ] following the expiration of the Term or termination pursuant to an uncured material breach by Ash Stevens of this Supply Agreement, manufacture or supply Products or substantially equivalent products to any other person or entity anywhere in the world without Cerus express written permission.
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
IN WITNESS WHEREOF, authorized representatives of the parties have executed this Supply Agreement.
ASH STEVENS INC. |
CERUS CORPORATION | |||||||
By: |
/s/ Stephen A. Munk |
By: | /s/ Kevin Green | |||||
Name: |
Stephen A. Munk |
Name: | Kevin Green | |||||
Title: |
President and CEO |
Title: | Vice-President, Finance and Chief Accounting Officer | |||||
Date: |
23 August 2011 |
Date: | 1 September 2011 |
EXHIBITS A-C ATTACHED HERETO ARE PART OF THIS SUPPLY AGREEMENT
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
EXHIBIT A
QUALITY AGREEMENT
QUALITY AGREEMENT
BETWEEN
ASH STEVENS INC.
AND
CERUS CORPORATION
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
TABLE OF CONTENTS
SEC. |
PAGE | |||
12. | RESPONSIBILITIES | 1 | ||
13. | REGULATORY RESPONSIBILITY | 1 | ||
14. | QUALITY ASSURANCE | 2 | ||
15. | PRODUCTION REQUIREMENTS | 2 | ||
16. | PRODUCT TESTING | 3 | ||
17. | PRODUCT RELEASE AND PRODUCT SHIPMENT | 3 | ||
18. | PRODUCT ACCEPTANCE | 3 | ||
19. | PRODUCT CHANGES | 4 | ||
20. | DOCUMENT RETENTION | 4 | ||
21. | AUDITS AND INSPECTIONS | 5 |
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
TABLE OF EXHIBITS
CROSS REFERENCE |
EXHIBIT |
PAGE |
||||||
SECTION 1 | 1 | RESPONSIBILITIES |
1-1 | |||||
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
QUALITY AGREEMENT
This Quality Agreement for Manufacture, Testing and Release of S-59 (the Quality Agreement) is entered into by and between ASH STEVENS INC., a Michigan corporation with its principal place of business at 5861 John C. Lodge Freeway, Detroit, Michigan 48202-3398 (Ash Stevens); and CERUS CORPORATION, a Delaware corporation with its principal place of business at 2550 Stanwell Drive, Concord, California 94520 (Cerus). Ash Stevens and Cerus are each individually referred to in this Quality Agreement as a Party and, collectively, as the Parties.
This Quality Agreement supplements the Amended and Restated Supply Agreement entered into between Ash Stevens and Cerus (the Supply Agreement), pursuant to which Ash Stevens agrees to manufacture Cerus proprietary S-59 compound (also known as Amotosalen and referred to herein as Product or Products) in accordance with Specifications and quality requirements agreed to with Cerus.
This Quality Agreement will be in effect concurrently with the Supply Agreement and will terminate upon the termination of the Supply Agreement. It is expected that this Quality Agreement will be amended from time to time, and will be reviewed annually or as needed to ensure it remains current with regulatory requirements.
TERMS AND CONDITIONS
1. RESPONSIBILITIES
The responsibilities of the Parties with respect to quality obligations are outlined in Exhibit 1 attached hereto (the Responsibilities).
2. REGULATORY RESPONSIBILITY
(a) Cerus is responsible for submitting the necessary information and/or documentation to various regulatory agencies (including local competent authorities) and notified bodies for Cerus as per applicable regulations and/or requirements as it relates to the manufacture, testing, or holding of Product(s) by Ash Stevens.
(b) [ * ] will maintain [ * ] for the Products. [ * ] will provide [ * ] relevant to [ * ]. [ * ] will maintain [ * ] for the Products.
(c) Ash Stevens will provide Cerus with access to documentation relating to the production, labeling, testing, or holding of each lot of Product(s), whether released or rejected, from the raw material stage up through and until completion of a batch, including, but not limited to, manufacturing processes and analytical test methods (the Master Batch Record(s)).
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
Furthermore, within [ * ] following termination or expiration of the Supply Agreement, or upon request by Cerus, Ash Stevens shall deliver to Cerus a copy of the Master Batch Records. Ash Stevens will also provide documentation necessary for submission to regulatory agencies relating to the facilities, equipment, personnel, and/or any other information requested by a regulatory agency, notified body or competent authority. If such information is considered proprietary to Ash Stevens, Ash Stevens will communicate such information directly to the regulating agency. Cerus will notify Ash Stevens and provide copies of any written requests by regulatory agencies for information relating to Ash Stevens processes.
(d) Except as necessary to comply with applicable laws and regulations, Ash Stevens will not independently interact (includes oral conversations or written correspondence) directly with any regulatory agency, competent authority, or notified body, excluding the FDA, in regards to the Product without the participation of and/or prior written approval of Cerus, unless such interactions are part of a normal surveillance audit of the quality management system. Ash Stevens will notify Cerus of any findings that relate directly to Cerus Product, the facility or the quality systems necessary to produce Cerus Product within [ * ] of receiving such notification, if reasonably possible.
3. QUALITY ASSURANCE
(a) All Products shall meet the Specifications and shall be subjected to a quality control inspection and final release by Ash Stevens in accordance with Ash Stevens quality control standards and systems and the most current requirements for active pharmaceutical ingredient (API) production. Ash Stevens will comply with the responsibilities set forth in the form attached as Exhibit 1 to this Quality Agreement.
(b) If any customer of Cerus rejects or returns Product as a result of quality issues, Cerus shall notify Ash Stevens in writing within [ * ]. If Ash Stevens so requests, Cerus will return any such Products to Ash Stevens at Ash Stevens expense.
(c) In the event that any Party receives any complaint regarding the Product, it shall notify the other Party within [ * ]. [ * ] will be responsible for evaluating these complaints and responding to [ * ] in writing. [ * ] will make an evaluation of each complaint it receives and will conduct all follow-up and communication which it deems appropriate.
4. PRODUCTION REQUIREMENTS
(a) Ash Stevens will manufacture the Products in accordance with the approved Master Batch Records. Any critical deviations will be reported within [ * ] to Cerus. Additionally, Ash Stevens will supply and maintain, as specified, all required suitable facilities, adequately trained staff, suitable equipment, and other production materials necessary to perform the manufacture and storage of the Product in accordance with the specified production and testing procedures and applicable standards, directives or regulations for API production.
(b) Cerus will monitor the production operations through oversight of Ash Stevens systems through periodic audits, monitoring of production quality metrics, and interactions necessary to resolve issues related to the production processes.
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
5. PRODUCT TESTING
(a) Ash Stevens is responsible for providing and maintaining suitable facilities, adequately trained staff, and suitable test equipment to perform routine inspection of incoming materials, and in-process testing and lot release in accordance with the scope of the Manufacturing Agreement and in compliance with applicable regulations.
(b) Ash Stevens is responsible for collecting specified in-process and/or QC test samples and conducting routine testing according to qualified or validated test methods.
(c) Ash Stevens is also responsible for qualifying Products, primary reference standards and annual stability studies at Cerus request. All testing will be performed at Cerus request.
6. PRODUCT RELEASE AND PRODUCT SHIPMENT
(a) Ash Stevens QA will review and provide disposition of completed, executed lot documentation for bulk Product. Ash Stevens will provide a release package to Cerus, which will include copies of applicable manufacturing and test data contained in the Batch Record and an Ash Stevens QA-approved Certificate of Analysis, to Cerus within [ * ] of release of product.
(b) Ash Stevens QA will review and provide completed executed packaging and shipping documentation to Cerus within [ * ] of shipment of the Product.
7. PRODUCT ACCEPTANCE
(a) Cerus has the right to inspect or audit bulk Product after production for integrity and adherence to the Specifications, directly or through its designee. Upon receipt of the Certificate of Analysis (CoA) for such bulk Product, Cerus (directly or through its designee) shall promptly conduct a reasonable inspection of such accompanying CoA for quantity and quality conformity. Unless Cerus or its designee notifies Ash Stevens in writing, within [ * ] from a receipt of a CoA, that it rejects a CoA of Product (a Notice of Rejection) for failure to conform to Specifications or failure to have been manufactured in accordance with regulatory requirements, Cerus shall be deemed to have accepted such bulk Product.
(b) Cerus has the right to inspect or audit repackaged Product following receipt of a shipment for integrity and adherence to the Specifications, directly or through its designee. Upon receipt of the shipping documentation for such repackaged Product, Cerus (directly or through its designee) shall promptly conduct a reasonable inspection of such shipping documentation for quantity and quality conformity. Unless Cerus or its designee notifies Ash Stevens in writing, within [ * ] from a receipt of a shipment, that it rejects a shipment of Product (a Notice of Rejection) for failure to conform to Specifications or failure to have been manufactured in accordance with regulatory requirements, Cerus shall be deemed to have accepted such Product.
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(c) If Cerus rejects any of the Products, it shall promptly notify Ash Stevens. Upon receipt of a Notice of Rejection, Ash Stevens shall immediately arrange to receive back the rejected Lot(s) of the Product. Ash Stevens may, within [ * ] have an agent inspect such goods for non-conformity, otherwise, such inspection shall be made on return of the non-conforming Products to Ash Stevens. If there is a dispute as to whether any portion of any shipment of the Product is not in compliance, such dispute shall be resolved by having a representative of Ash Stevens observe the performance of the analytical testing by Cerus or Cerus designee personnel or by having one of their representatives observe the performance of the analytical testing by Ash Stevens personnel. If the discrepancy results cannot be resolved in this manner, the testing shall be performed by an independent, mutually acceptable, qualified third party.
(d) Rework of Product rejected by Cerus will only be performed following a mutually agreed upon plan. Routine issues that are identified and resolved during manufacturing and product testing will be documented in the Products Batch Record and will be approved by Ash Stevens. All reworked material must meet final release requirements.
(e) If a lot of Product is rejected, Ash Stevens will schedule another production run as soon as commercially reasonable thereafter and will deliver a new lot of Product if so requested in writing by Cerus.
(f) Unless Ash Stevens commits unlawful acts during the production, testing, or release of the Product, all liability of Ash Stevens shall end upon satisfactory compliance of the Products with agreed upon specification.
8. PRODUCT CHANGES
(a) For any Product changes proposed by Ash Stevens, Ash Stevens will initiate this change by submitting a written change request to Cerus. For changes that are proposed for Product-specific materials, labels, packaging materials, product or production processes, Cerus must approve the change prior to implementation. Cerus will be responsible for all changes to the Product, regardless of who first initiated the change.
(b) Cerus may initiate a change by submitting the Cerus change control form to Ash Stevens. Ash Stevens will review the change, evaluate the feasibility and consequences, and provide feedback to Cerus on the manufacturability of the changed design, as applicable.
9. DOCUMENT RETENTION
Ash Stevens will retain all executed manufacturing documentation, test and release records according to their written procedures. No records relating to Cerus product will be destroyed without prior written approval from Cerus.
10. AUDITS AND INSPECTIONS
(a) Ash Stevens will allow Cerus access to their facilities and personnel, [ * ] for the purposes of routine regulatory compliance audits according to Cerus written procedures and
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
according to a schedule mutually agreed upon by Cerus and Ash Stevens, not expected to exceed [ * ] but generally with [ * ] prior notification. Ash Stevens will allow Cerus expedited access to their facilities and personnel for for cause audits as may be warranted by repeated or otherwise significant compliance failures of which Cerus will provide written notification at least [ * ] prior to the requested audit. Ash Stevens will respond to all observations from audits within the number of business days indicated on the audit report submitted to them by Cerus. If the parties agree that corrective action is required, time frames for completion will be provided in the response.
(b) If Ash Stevens is notified of a regulatory authority inspection of the Product, Ash Stevens will inform Cerus in writing within [ * ] of receiving such notification, and Cerus will cooperate with Ash Stevens throughout the audit process.
(c) If Cerus is notified of a regulatory authority inspection of the Product, Cerus will inform Ash Stevens in writing within [ * ] of receiving such notification, and Ash Stevens will cooperate with Cerus throughout the audit process.
(d) Cerus will have the right to be present during all regulatory authority inspections for the Product that is manufactured, held, or tested at Ash Stevens site(s). Both Cerus and Ash Stevens will make every effort possible to provide information requested by a regulatory authority, if they have such information available, within [ * ] of receipt of the request. It is the responsibility of the party being audited to address all observations, citations, or notifications of compliance deficiencies in a timely manner. Ash Stevens will provide Cerus sufficient evidence of correction of any non-conformity that could reasonably impact Product quality
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
IN WITNESS WHEREOF, authorized representatives of the parties have executed this Quality Agreement.
ASH STEVENS INC. | CERUS CORPORATION | |||||||
By: |
/s/ Gary. A. Baker |
By: | /s/ John Hull | |||||
Name: |
Gary A. Baker | Name: | John Hull | |||||
Title: |
Vice-President, Quality Systems | Title: | Senior Director, Regulatory Compliance and Quality | |||||
Date: |
29 Aug 2011 | Date: | August 31, 2011 |
EXHIBIT 1 ATTACHED HERETO IS PART OF THIS QUALITY AGREEMENT
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
EXHIBIT 1
RESPONSIBILITIES
(A) Ash Stevens Responsibilities
1. | Maintain Specifications and test methods for S-59 Compound, and Packaging Materials and Labeling according to Cerus requirements. |
2. | Sample and maintain reserve samples. |
3. | Test and perform quality release of Product primary reference standard, Raw Materials, Intermediates, Finished Product, Packaging Materials, and Labeling according to IDE, PMA, and master file submissions and approved specification requirements. |
4. | Provide notification to Cerus Quality Assurance of any change to Production or Test Records, SOPs, Raw Material Specifications or Test Methods. |
5. | Perform testing as directed by master records, protocols, or analytical test requests. |
6. | Maintain manufacturing and packaging records as approved by Cerus. |
7. | Perform cleaning procedures per current API requirements. |
8. | Perform cleaning and process validation per protocol approved by Cerus and Ash Stevens. |
9. | Review and forward all deviation reports to Cerus for review as part of batch record documentation. |
10. | Provide Master Batch Records and other related manufacturing documentation regarding Product, upon request by Cerus. |
11. | Review and forward copy of executed batch records, test records, Certificates of Analysis, and related documents, as required, to Cerus Quality Assurance for review. |
12. | Provide Certificate of Analysis, if requested, to support Cerus and partners in and outside US markets. |
13. | Maintain facility and critical systems in a current state of compliance and validation per API requirements. |
14. | Agree to regular audits by Cerus and/or Cerus designee at mutually acceptable times. |
15. | Support Cerus regulatory submissions by providing information requested in a timely manner. |
16. | Notify Cerus immediately of pending regulatory authority audits related to S-59. Provide results of any audit, whether or not related to Cerus manufacturing. |
17. | Perform shipping validations at Cerus expense, annual product reviews and product stability studies |
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(B) Cerus Responsibilities
1. | Provide Ash Stevens with current, approved regulatory documents including details for the production of S-59 Compound, Specifications for S-59 Compound, Intermediates, and Raw Materials, Packaging Materials, and Labeling. |
2. | Provide to or approve Ash Stevens current approved and validated (if non-compendial) test methods for S-59 compound. |
3. | Approve master manufacturing and packaging documents. If changes are indicated, provide edited copies to ASI to facilitate revision. |
4. | Provide storage and transportation requirements to Ash Stevens. |
5. | Provide Ash Stevens with authorization to manufacture. |
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
EXHIBIT B
PRODUCT SPECIFICATIONS
[ * ]
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
EXHIBIT C
PRODUCT PRICING OF S-59 (AS OF 2011)
[ * ]
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
Exhibit 10.2
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
CERUS CORPORATION
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT (this Agreement) is entered into as of September 30, 2011, by and between Comerica Bank (Bank) and CERUS CORPORATION (Borrower).
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank.
AGREEMENT
The parties agree as follows:
1. | DEFINITIONS AND CONSTRUCTION. |
1.1 Definitions. As used in this Agreement, all capitalized terms shall have the definitions set forth on Exhibit A. Any term used in the Code and not defined herein shall have the meaning given to the term in the Code.
1.2 Accounting Terms. Any accounting term not specifically defined on Exhibit A shall be construed in accordance with GAAP and all calculations shall be made in accordance with GAAP. The term financial statements shall include the accompanying notes and schedules.
2. | LOAN AND TERMS OF PAYMENT. |
2.1 Credit Extensions.
(a) Promise to Pay. Borrower promises to pay to Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower, together with interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof.
(b) Advances Under Revolving Line.
(i) Amount. Subject to and upon the terms and conditions of this Agreement, including an audit of the Collateral, the results of which shall be satisfactory to Bank, Borrower may request Advances in an aggregate outstanding amount not to exceed the lesser of (A) the Revolving Line or (B) the Borrowing Base. Except as set forth in the Pricing Addendum amounts borrowed pursuant to this Section 2.1(b) may be repaid and reborrowed at any time without penalty or premium prior to the Revolving Maturity Date, at which time all Advances under this Section 2.1(b) shall be immediately due and payable.
(ii) Form of Request. Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time (12:00 p.m. Pacific time for wire transfers), on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit C and a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Banks discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any facsimile or telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1(b) to Borrowers deposit account.
1
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(c) Growth Capital Advances.
(i) Subject to and upon the terms and conditions of this Agreement, Bank agrees to make Growth Capital Advances to Borrower in two (2) tranches, Tranche A and Tranche B. Borrower may request the Tranche A Growth Capital Advance at any time from the Closing Date through the Tranche A Availability End Date. Borrower may request the Tranche B Growth Capital Advance at any time from the Tranche B Availability Date through the Tranche B Availability End Date. The aggregate outstanding amount of Growth Capital Advances shall not exceed the Growth Capital Line.
(ii) Interest shall accrue from the date of each Growth Capital Advance at the rate specified in Section 2.3(a), and shall be payable in accordance with Section 2.3(c). Any Tranche A Growth Capital Advances that are outstanding on the Tranche A Interest Only End Date shall be payable in thirty six (36) equal monthly installments of principal, plus all accrued interest, beginning on the first Business Day of the first month following the Tranche A Interest Only End Date, and continuing on the same day of each month thereafter through the Growth Capital Maturity Date, at which time all amounts due in connection with Tranche A Growth Capital Advance shall be immediately due and payable. Any Tranche B Growth Capital Advances that are outstanding on the Tranche B Interest Only End Date shall be payable in thirty six (36) equal monthly installments of principal, plus all accrued interest, beginning on the first Business Day of the first month following the Tranche B Interest Only End Date and continuing on the same day of each month thereafter through the Growth Capital Maturity Date, at which time all amounts due in connection with Tranche B Growth Capital Advance and any other amounts due under this Agreement, including but not limited to any part of the Final Payment not previously paid, shall be immediately due and payable. Growth Capital Advances, once repaid, may not be reborrowed. Except as set forth in Section 2.1(c)(iv), Borrower may prepay any Growth Capital Advances in whole or in part without penalty or premium. Partial prepayments hereunder shall be applied to the installments hereunder in the inverse order of their maturities without reamortization of the repayment schedule for the remaining principal balance.
(iii) When Borrower desires to obtain a Growth Capital Advance, Borrower shall notify Bank (which notice shall be irrevocable) by facsimile transmission to be received no later than 3:00 p.m. Pacific time three (3) Business Days before the day on which the Growth Capital Advance is to be made. Such notice shall be substantially in the form of Exhibit C. The notice shall be signed by a Responsible Officer or its designee. Bank shall be entitled to rely on any facsimile or telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnity and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance.
(iv) Borrower shall have the option to prepay all, but not less than all, of the Growth Capital Advances advanced by Bank under this Agreement, provided Borrower (i) provides written notice to Bank of its election to prepay the Growth Capital Advances at least five (5) days prior to such prepayment, and (ii) pays to Bank on the date of such prepayment an amount equal to the sum of (A) all outstanding principal of the Growth Capital Advance plus accrued but unpaid interest thereon through the prepayment date, (B) the Final Payment, plus (C) all other sums, that shall have become due and payable but have not been paid, including Bank Expenses, if any, and interest at the default rate with respect to any past due amounts (including but not limited to any loss, cost or expense incurred by Bank as a result of such prepayment, including, without limitation, any such loss, cost or expense incurred in obtaining, liquidating, employing or redeploying deposits from third parties).
2.2 Overadvances. If the aggregate amount of the outstanding Advances exceeds the lesser of the Revolving Line or the Borrowing Base at any time, Borrower shall immediately pay to Bank, in cash, the amount of such excess.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rates.
(i) Advances. Except as set forth in Section 2.3(b), the Advances shall bear interest, on the outstanding daily balance thereof, as set forth in the Pricing Addendum.
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(ii) Growth Capital Advances. Except as set forth in Section 2.3(b), the Growth Capital Advances shall bear interest, on the outstanding daily balance thereof, at a per annum rate, fixed on the date of funding of each Growth Capital Advance, equal to the greater of (a) six and one quarter percent (6.25%) and (b) the sum of (I) the three (3) month U.S. LIBOR rate reported in the Wall Street Journal three (3) Business Days prior to the funding date of such Growth Capital Advance, plus (II) six percent (6.00%).
(b) Late Fee; Default Rate. If any payment is not made within 10 days after the date such payment is due, Borrower shall pay Bank a late fee equal to the lesser of (i) five percent (5%) of the amount of such unpaid amount or (ii) the maximum amount permitted to be charged under applicable law. All Obligations shall bear interest, from and after the occurrence and during the continuance of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default.
(c) Payments. Except as set forth in the Pricing Addendum, interest hereunder shall be due and payable on the 1st calendar day of each month during the term hereof; provided that, whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrowers deposit accounts or against the Revolving Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder.
(d) Computation. With respect to Obligations bearing interest at the Prime Rate, in the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased, effective as of the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence and during the continuance of an Event of Default, Bank shall have the right, in its sole discretion, to immediately apply any wire transfer of funds, check, or other item of payment Bank may receive to conditionally reduce Obligations, but such applications of funds shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day.
2.5 Fees. Borrower shall pay to Bank the following:
(a) Revolving Line Facility Fee. On the Closing Date and each anniversary thereof, a fee on account of the Revolving Line equal to Twenty Thousand Dollars ($20,000), which shall be nonrefundable; provided that Bank hereby acknowledges receipt of the amount due on the Closing Date;
(b) Growth Capital Line Facility Fee. On the Closing Date, a fee on account of the Growth Capital Line equal to Forty Thousand Dollars ($40,000), which shall be nonrefundable (receipt of which Bank hereby acknowledges);
(c) Final Payment. The Final Payment, when due; and
(d) Bank Expenses. On the Closing Date, all Bank Expenses incurred through the Closing Date and to complete the post-closing items listed in Section 6.11 or the Closing Checklist (not to exceed Fifty Thousand Dollars ($50,000) for the account of Borrower), and, after the Closing Date (other than the post-closing items listed in Section 6.11 and the Closing Checklist), all Bank Expenses, as and when they become due.
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
Notwithstanding the foregoing, if, prior to the Growth Capital Maturity Date, Bank and Borrower enter into an amendment to this Agreement which has as its sole purpose an increase of the Credit Extensions to Twelve Million Dollars ($12,000,000), no fees or Bank Expenses shall be due or payable by Borrower in connection with such amendment.
2.6 Term. This Agreement shall become effective on the Closing Date and, subject to Section 13.8, shall continue in full force and effect for so long as any Obligations (other than contingent indemnification obligations) remain outstanding or Bank has any obligation to make Credit Extensions under this Agreement. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default.
3. | CONDITIONS OF LOANS. |
3.1 Conditions Precedent to Initial Credit Extension. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) an officers certificate of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement;
(c) the Schedule;
(d) UCC National Form Financing Statement;
(e) agreement to furnish insurance;
(f) the Pricing Addendum;
(g) a payoff letter from Oxford in respect of the Existing Indebtedness;
(h) evidence that (i) the Liens securing the Existing Indebtedness will be terminated and (ii) the documents and/or filings evidencing the perfection of such Liens, including without limitation any financing statements and/or control agreements, have or will, concurrently with the initial Credit Extension, be terminated;
(i) payment of the fees and Bank Expenses then due specified in Section 2.5;
(j) current SOS Reports indicating that except for Permitted Liens, there are no other security interests or Liens of record in the Collateral;
(k) current financial statements, including audited statements for Borrowers most recently ended fiscal year, together with an unqualified opinion, company prepared consolidated balance sheets and income statements for the month ended July 31, 2011, and such other updated financial information as Bank may reasonably request;
(l) current Compliance Certificate in accordance with Section 6.2;
(m) a Collateral Information Certificate;
(n) securities and/or deposit account control agreements with respect to any accounts permitted hereunder to be maintained outside Bank;
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(o) an Automatic Debit Authorization; and
(p) such other documents or certificates, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and
(b) the representations and warranties contained in Article 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would exist after giving effect to such Credit Extension (provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date). The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2.
4. | CREATION OF SECURITY INTEREST. |
4.1 Grant of Security Interest. Borrower grants and pledges to Bank a continuing security interest in the Collateral to secure prompt repayment of any and all Obligations and to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in later-acquired Collateral. Borrower also hereby agrees not to sell, transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber any of its Intellectual Property, except in connection with Permitted Liens and Permitted Transfers. Notwithstanding any termination of this Agreement, Banks Lien on the Collateral shall remain in effect for so long as any Obligations (other than contingent indemnification obligations) are outstanding.
4.2 Perfection of Security Interest. Borrower authorizes Bank to file at any time financing statements, continuation statements, and amendments thereto that (i) either specifically describe the Collateral or describe the Collateral as all assets of Borrower of the kind pledged hereunder, and (ii) contain any other information required by the Code for the sufficiency of filing office acceptance of any financing statement, continuation statement, or amendment, including whether Borrower is an organization, the type of organization and any organizational identification number issued to Borrower, if applicable. Any such financing statements may be filed by Bank at any time in any jurisdiction whether or not Revised Article 9 of the Code is then in effect in that jurisdiction. Borrower shall from time to time endorse and deliver to Bank, at the request of Bank, all Negotiable Collateral and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfection of Banks security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. Borrower shall have possession of the Collateral, except where expressly otherwise provided in this Agreement or where Bank chooses to perfect its security interest by possession in addition to the filing of a financing statement. Where Collateral is in possession of a third party bailee, Borrower shall take such steps as Bank reasonably requests for Bank to (i) obtain an acknowledgment, in form and substance satisfactory to Bank, of the bailee that the bailee holds such Collateral for the benefit of Bank, and (ii) obtain control of any Collateral consisting of investment property, deposit accounts, letter-of-credit rights or electronic chattel paper (as such items and the term control are defined in Revised Article 9 of the Code) by causing the securities intermediary or depositary institution or issuing bank to execute a control agreement in form and substance satisfactory to Bank. Borrower will not create any chattel paper without placing a legend on the chattel paper acceptable to Bank indicating that Bank has a security interest in the chattel paper. Borrower from time to time may deposit with Bank specific cash collateral to secure specific Obligations; Borrower authorizes Bank to hold such specific balances in pledge and to decline to honor any drafts thereon or any request by Borrower or any other Person to pay or otherwise transfer any part of such balances for so long as the specific Obligations are outstanding.
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
4.3 Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrowers usual business hours but no more than twice a year (unless an Event of Default has occurred and is continuing), to inspect Borrowers Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrowers financial condition or the amount, condition of, or any other matter relating to, the Collateral.
4.4 Pledge of Collateral. Borrower hereby pledges, assigns and grants to Bank a security interest in all the Shares, together with all proceeds and substitutions thereof, all cash, stock and other moneys and property paid thereon, all rights to subscribe for securities declared or granted in connection therewith, and all other cash and noncash proceeds of the foregoing, as security for the performance of the Obligations. Within thirty (30) days after the Closing Date, if the Shares are certificated or, if not then certificated, with ten (10) days of certification thereof, the certificate or certificates for the Shares will be delivered to Bank, accompanied by an instrument of assignment duly executed in blank by Borrower. To the extent required by the terms and conditions governing the Shares, Borrower shall cause the books of each entity whose Shares are part of the Collateral and any transfer agent to reflect the pledge of the Shares. Upon the occurrence and during the continuance of an Event of Default hereunder, Bank may effect the transfer of any securities included in the Collateral (including but not limited to the Shares) into the name of the Bank and cause new certificates representing such securities to be issued in the name of the Bank or its transferee. Borrower will execute and deliver such documents, and take or cause to be taken such actions, as Bank may reasonably request to perfect or continue the perfection of Banks security interest in the Shares. Unless an Event of Default shall have occurred and be continuing and Bank shall have provided notice to Borrower, Borrower shall be entitled to exercise any voting rights with respect to the Shares and to give consents, waivers and ratifications in respect thereof, provided that no vote shall be cast or consent, waiver or ratification given or action taken which would be inconsistent with any of the terms of this Agreement or which would constitute or create any violation of any of such terms. All such rights to vote and give consents, waivers and ratifications shall terminate with notice by Bank to Borrower upon the occurrence and continuance of an Event of Default.
5. | REPRESENTATIONS AND WARRANTIES. |
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary is an entity duly existing under the laws of the jurisdiction in which it is organized and qualified and licensed to do business in any state in which the conduct of its business or its ownership of property requires that it be so qualified, except where the failure to do so could not reasonably be expected to cause a Material Adverse Effect.
5.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrowers powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrowers organizational documents, nor will they constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement by which it is bound, except to the extent such default would not reasonably be expected to cause a Material Adverse Effect.
5.3 Collateral. Borrower has rights in or the power to transfer the Collateral, and its title to the Collateral is free and clear of Liens, adverse claims, and restrictions on transfer or pledge except for Permitted Liens. All Collateral is located solely in the Collateral States. The Eligible Accounts are bona fide existing obligations. The property or services giving rise to such Eligible Accounts has been delivered or rendered to the account debtor or its agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor whose accounts are included in any Borrowing Base Certificate as an Eligible Account. No licenses or agreements giving rise to such Eligible Accounts is with any Prohibited Territory or with any Person organized under or doing business (concerning Borrowers products) in a Prohibited Territory. All Inventory is in all material respects of good and merchantable quality, free from all material defects, except for Inventory for which adequate reserves have been made. Except as set forth in the Schedule, none of Borrowers Cash is maintained or invested with a Person other than Bank or Banks Affiliates.
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
5.4 Intellectual Property. Borrower is the sole owner of the Intellectual Property which it owns or purports to own except for (a) non-exclusive licenses granted to third parties in the ordinary course of business and licenses that may be exclusive in respects other than territory and that may be exclusive as to territory only as to discreet geographical areas outside of the United States, (b) over-the-counter software that is commercially available to the public and non-material inbound-licensed Intellectual Property, and (c) material Intellectual Property licensed to Borrower and noted on the Schedule. To the best of Borrowers knowledge, each Patent which it owns or purports to own and which is material to Borrowers business is valid and enforceable, and no part of the Intellectual Property which Borrower owns or purports to own and which is material to Borrowers business has been judged invalid or unenforceable, in whole or in part. To the best of Borrowers knowledge, no claim has been made that any part of the Intellectual Property violates the rights of any third party except to the extent such claim would not reasonably be expected to have a material adverse effect on Borrowers business. Except as noted on the Schedule, Borrower is not a party to, nor is it bound by, any Restricted License.
5.5 Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Borrower has not done business under any name other than that specified on the signature page hereof, and its exact legal name is as set forth in the first paragraph of this Agreement. The chief executive office of Borrower is located in the Chief Executive Office State at the address indicated in Section 10 hereof.
5.6 Actions, Suits, Litigation, or Proceedings. Except as set forth in the Schedule, there are no actions, suits, litigation or proceedings, at law or in equity, pending by or against Borrower or any Subsidiary before any court, administrative agency, or arbitrator in which a likely adverse decision could reasonably be expected to have a Material Adverse Effect.
5.7 No Material Adverse Change in Financial Statements. All consolidated (and, if and when Borrower has any Subsidiaries, consolidating) financial statements related to Borrower and any Subsidiary that are delivered by Borrower to Bank fairly present in all material respects Borrowers consolidated (and, if and when Borrower has any Subsidiaries, consolidating) financial condition as of the date thereof and Borrowers consolidated and consolidating results of operations for the period then ended. There has not been a material adverse change in the consolidated or in the consolidating financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank.
5.8 Solvency, Payment of Debts. Borrower is able to pay its debts (including trade debts) as they mature; the fair saleable value of Borrowers assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; and Borrower is not left with unreasonably small capital after the transactions contemplated by this Agreement.
5.9 Compliance with Laws and Regulations. Borrower and each Subsidiary have met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrowers failure to comply with ERISA that is reasonably likely to result in Borrowers incurring any liability that could reasonably be expected to have a Material Adverse Effect. Borrower is not an investment company or a company controlled by an investment company within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T and U of the Board of Governors of the Federal Reserve System). Borrower has complied in all material respects with all the provisions of the Federal Fair Labor Standards Act. Borrower is in compliance with all environmental laws, regulations and ordinances except where the failure to comply is not reasonably likely to have a Material Adverse Effect. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, the violation of which could reasonably be expected to have a Material Adverse Effect. Borrower and each Subsidiary have filed or caused to be filed all tax returns required to be filed, and have paid, or have made adequate provision for the payment of, all taxes reflected therein except those being contested in good faith with adequate reserves under GAAP or where the failure to file such returns or pay such taxes could not reasonably be expected to have a Material Adverse Effect.
5.10 Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments and except as set forth on the Schedule.
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
5.11 Government Consents. Borrower and each Subsidiary have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrowers business as currently conducted, except where the failure to do so would not reasonably be expected to cause a Material Adverse Effect.
5.12 Use of Proceeds. Borrower shall use the proceeds of the Credit Extensions solely as working capital and to fund its general business requirements and not for personal, family, household or agricultural purposes. Without limiting the foregoing, a portion of the proceeds of the Tranche A Growth Capital Advance shall be used by Borrower to repay the Existing Indebtedness in full on the Closing Date.
5.13 Shares. Borrower has full power and authority to create a first lien on the Shares and no disability or contractual obligation exists that would prohibit Borrower from pledging the Shares pursuant to this Agreement. To Borrowers knowledge, there are no subscriptions, warrants, rights of first refusal or other restrictions on transfer relative to, or options exercisable with respect to the Shares. The Shares have been and will be duly authorized and validly issued, and are fully paid and non-assessable. To Borrowers knowledge, the Shares are not the subject of any present or threatened suit, action, arbitration, administrative or other proceeding, and Borrower knows of no reasonable grounds for the institution of any such proceedings.
5.14 Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank, as of the date such representation, warranty or other statement was made, taken together with all such certificates and written statements furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading, it being recognized by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not to be viewed as facts and that actual results during the period or periods covered by any such projections, forecasts and forward-looking statements may differ from the projected or forecasted results.
6. | AFFIRMATIVE COVENANTS. |
Borrower covenants that, until payment in full of all outstanding Obligations (other than contingent indemnification obligations), and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following:
6.1 Good Standing and Government Compliance. Borrower shall maintain its and each of its Subsidiaries organizational existence and good standing in the Borrower State, shall maintain qualification and good standing in each other jurisdiction in which the failure to so qualify could reasonably be expected to have a Material Adverse Effect, and shall furnish to Bank the organizational identification number issued to Borrower by the authorities of the jurisdiction in which Borrower is organized, if applicable. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply in all material respects with all applicable Environmental Laws, and maintain all material permits, licenses and approvals required thereunder where the failure to do so could reasonably be expected to have a Material Adverse Effect. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, and shall maintain, and shall cause each of its Subsidiaries to maintain, in force all licenses, approvals and agreements, the loss of which or failure to comply with which would reasonably be expected to have a Material Adverse Effect.
6.2 Financial Statements, Reports, Certificates. Borrower shall deliver to Bank: (i) as soon as available, but in any event within thirty (30) days after the end of each calendar month, other than forty-five (45) days after the (a) last day of each January and (b) the last day of each month following the last month of each fiscal quarter (i.e. for the months of April, July, and October); (ii) forty-five (45) days after the end of each of the first three calendar quarters, company prepared consolidated and consolidating balance sheet and income statement covering Borrowers operations during such period, in a form reasonably acceptable to Bank and certified by a Responsible Officer; (iii) as soon as available, but in any event within one hundred twenty (120) days after the end of Borrowers fiscal year, audited consolidated and consolidating financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an opinion which is unqualified (including no going
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
concern comment or qualification) or otherwise consented to in writing by Bank on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (iv) if applicable, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and all reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission; (v) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of One Hundred Fifty Thousand Dollars ($150,000) or more; (vi) promptly upon receipt, each management letter prepared by Borrowers independent certified public accounting firm regarding Borrowers management control systems; (vii) as soon as available, but in any event not later than January 31 of each calendar year, Borrowers financial and business projections and budget for such year, with evidence of approval thereof by Borrowers board of directors; and (viii) such budgets, sales projections, operating plans or other financial information generally prepared by Borrower in the ordinary course of business as Bank may reasonably request from time to time.
(a) Within thirty (30) days after the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto, together with aged listings by invoice date of accounts receivable and accounts payable.
(b) Within thirty (30) days after the last day of each month, Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate certified as of the last day of the applicable month and signed by a Responsible Officer in substantially the form of Exhibit E hereto.
(c) Immediately upon becoming aware of the occurrence or existence of an Event of Default hereunder, a written statement of a Responsible Officer setting forth details of the Event of Default, and the action which Borrower has taken or proposes to take with respect thereto.
(d) Bank shall have a right from time to time hereafter to audit Borrowers Accounts and appraise Collateral at Borrowers expense (not to exceed Three Thousand Five Hundred Dollars ($3,500), unless an Event of Default has occurred and is continuing, per audit or appraisal), provided that such audits will be conducted no more often than every six (6) months unless an Event of Default has occurred and is continuing.
Borrower may deliver to Bank on an electronic basis any certificates, reports or information required pursuant to this Section 6.2, and Bank shall be entitled to rely on the information contained in the electronic files, provided that Bank in good faith believes that the files were delivered by a Responsible Officer. If Borrower delivers this information electronically, it shall also deliver to Bank by U.S. Mail, reputable overnight courier service, hand delivery, facsimile or .pdf file within five (5) Business Days of submission of the unsigned electronic copy the certification of monthly financial statements, the Borrowing Base Certificate and the Compliance Certificate, each bearing the physical signature of the Responsible Officer.
6.3 Inventory; Returns. Borrower shall keep all Inventory in good and merchantable condition, free from all material defects except for Inventory for which adequate reserves have been made. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist on the Closing Date. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims involving more than One Hundred Fifty Thousand Dollars ($150,000).
6.4 Taxes. Borrower shall make, and cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, including, but not limited to, those laws concerning income taxes, F.I.C.A., F.U.T.A. and state disability, and will execute and deliver to Bank, on demand, proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits and any appropriate certificates attesting to the payment or deposit thereof; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower.
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
6.5 Insurance.
(a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrowers business is conducted on the date hereof. Borrower shall also maintain liability and other insurance in amounts and of a type that are customary to businesses similar to Borrowers.
(b) All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All policies of property insurance shall contain a lenders loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee, and all liability insurance policies shall show Bank as an additional insured and specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Upon Banks request, Borrower shall deliver to Bank certified copies of the policies of insurance and evidence of all premium payments. If no Event of Default has occurred and is continuing, proceeds payable under any casualty policy will, at Borrowers option, be payable to Borrower to replace the property subject to the claim, provided that any such replacement property shall be deemed Collateral in which Bank has been granted a first priority security interest. If an Event of Default has occurred and is continuing, all proceeds payable under any such policy shall, at Banks option, be payable to Bank to be applied on account of the Obligations.
6.6 Accounts. Borrower shall maintain all its primary domestic depository and operating accounts with Bank and its primary investment accounts with Bank or Banks Affiliates (covered by satisfactory control agreements). Notwithstanding the foregoing, Cerus B.V. shall be permitted to maintain accounts with ABN AMRO numbered [ * ], not subject to Control Agreements (or similar) provided the aggregate amount in such accounts shall not exceed 120% of (i) Cerus BVs immediately preceding months operating expenses plus (ii) any amounts representing 2% of the commission on gross sales paid by Borrower to Cerus BV as set forth in the Commissionaire Agreement, at any time. Notwithstanding the foregoing, (x) in no event shall Cerus BVs operating expenses exceed 200% of Cerus BVs operating expenses for the immediately preceding 12 calendar month period, calculated as of the end of each calendar month for such 12 calendar month period then ended; and (y) Borrower shall have sixty (60) days from the Closing Date to terminate its accounts at Wells Fargo Bank, N.A. or its affiliates and to transfer the balances therein to accounts with Bank.
6.7 Financial Covenants. Borrower shall maintain the following financial ratios and covenants:
(a) Minimum Cash. A balance of Cash at Bank, at all times, of not less than Two Million Five Hundred Thousand Dollars ($2,500,000).
(b) Performance to Plan. Revenues, measured monthly on a trailing six (6) month basis, shall be at least seventy-five percent (75%) of the monthly projections (for the applicable trailing six (6) month period) that have been approved by Borrowers Board of Directors and attached to the Schedule hereto as Annex I. Borrower shall deliver to Bank updated projections approved by Borrowers Board of Directors for the next fiscal year in accordance with Section 6.2.
6.8 Protection of Intellectual Property Rights.
(a)(i) Use commercially reasonable efforts to protect, defend and maintain the validity and enforceability of its Intellectual Property material to Borrowers business; (ii) promptly advise Bank in writing of material infringements of its Intellectual Property; and (iii) not allow any Intellectual Property material to Borrowers business to be abandoned, forfeited or dedicated to the public without Banks written consent.
(b) Provide written notice to Bank within ten (10) days of entering or becoming bound by any Restricted License (other than over-the-counter software that is commercially available to the public). Borrower shall take such commercially reasonable steps as Bank requests to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for (i) any Restricted License entered into after the date hereof, to be
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
deemed Collateral and for Bank to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such Restricted License, whether now existing or entered into in the future, and (ii) with respect to any Restricted License entered into after the date hereof, Bank to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance with Banks rights and remedies under this Agreement and the other Loan Documents.
6.9 Intentionally Omitted.
6.10 Creation/Acquisition of Subsidiaries. At the time that Borrower or any Subsidiary forms any direct or indirect Subsidiary or acquires any direct or indirect Subsidiary after the Closing Date, Borrower and such Subsidiary shall (a) cause each such new Subsidiary to provide to Bank a joinder to this Agreement to cause such Subsidiary to become a guarantor or co-borrower hereunder, or provide Bank alternative security satisfactory to Bank in its reasonable discretion, together with such appropriate financing statements and/or Control Agreements, all in form and substance reasonably satisfactory to Bank (including being sufficient to grant Bank a first priority Lien (subject to Permitted Liens) in and to the assets of such newly formed or acquired Subsidiary); and/or, in Banks reasonable discretion, (b) provide to Bank appropriate certificates and powers and financing statements, pledging all of the Shares of such new Subsidiary, in form and substance satisfactory to Bank; and (c) provide to Bank all other documentation in form and substance reasonably satisfactory to Bank, including one or more opinions of counsel satisfactory to Bank, which in its opinion is appropriate with respect to the execution and delivery of the applicable documentation referred to above. Any document, agreement, or instrument executed or issued pursuant to this Section 6.10 shall be a Loan Document.
6.11 Post-Close Deliverables. Borrower shall cause the following to be delivered to Bank, within thirty (30) days of the Closing Date: (i) the Dutch Organizational Documents; (ii) the Deeds of Pledge; (iii) the Collateral Assignment; (iv) the certificate(s) for the Shares (to the extent certificated), together with Assignment(s) Separate from Certificate, duly executed in blank; and (v) a Bailee Waiver (or similar), in form and content reasonably acceptable to Bank, with respect to each Required Bailee.
6.12 Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement.
7. | NEGATIVE COVENANTS. |
Borrower covenants and agrees that, so long as any credit hereunder shall be available and until the outstanding Obligations (other than contingent indemnification obligations) are paid in full or for so long as Bank may have any commitment to make any Credit Extensions, Borrower will not do any of the following without Banks prior written consent, which shall not be unreasonably withheld:
7.1 Dispositions. Convey, sell, lease, license, transfer or otherwise dispose of (collectively, to Transfer), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, or subject to Section 6.6 of the Agreement, move cash balances on deposit with Bank to accounts opened at another financial institution, other than Permitted Transfers. It is understood that a distribution agreement which may include a license to sell and/or use trademarks (but which does not include the right to make products) is not considered a Transfer.
7.2 Change in Name, Location, Executive Office, or Executive Management; Change in Business; Change in Fiscal Year; Change in Control. Change its name or the Borrower State or relocate its chief executive office without thirty (30) days prior written notification to Bank; Borrowers chief executive officer or chief financial officer shall cease to be actively engaged in the management of Borrower unless a replacement for such officer is approved by Borrowers Board of Directors and engaged by Borrower within ninety (90) days of such change; engage in any business, or permit any of its Subsidiaries to engage in any business, other than or reasonably related or incidental to the businesses currently engaged in by Borrower; change its fiscal year end; have a Change in Control.
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization (other than mergers or consolidations of a Subsidiary into another Subsidiary or into Borrower), or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, or enter into any agreement to do any of the same, except where (i) such transactions do not in the aggregate exceed Two Hundred Thousand Dollars ($200,000) during any fiscal year, (ii) no Event of Default has occurred, is continuing or would exist after giving effect to such transactions, (iii) such transactions do not result in a Change in Control, and (iv) Borrower is the surviving entity.
7.4 Indebtedness. Create, incur, assume, guarantee or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness, or prepay any Indebtedness or take any actions which impose on Borrower an obligation to prepay any Indebtedness, except Indebtedness to Bank.
7.5 Encumbrances. Create, incur, assume or allow any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens, or covenant to any other Person that Borrower in the future will refrain from creating, incurring, assuming or allowing any Lien with respect to any of Borrowers property, except as is otherwise permitted in Sections 6.8(b) and 7.1 hereof and clause (c) of the definition of Permitted Liens herein.
7.6 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock, except that Borrower may (i) repurchase the stock of current or former employees, directors or consultants pursuant to stock repurchase agreements or stock purchase plans as long as an Event of Default does not exist prior to such repurchase or would not exist after giving effect to such repurchase, (ii) repurchase the stock of current or former employees, directors or consultants pursuant to stock repurchase agreements by the cancellation of indebtedness owed by such former employees to Borrower regardless of whether an Event of Default exists, (iii) convert any of its convertible securities into other securities pursuant to the terms of such convertible securities or otherwise in exchange thereof, (iv) pay dividends or distributions in shares of its equity securities, (v) purchases for value of any rights distributed in connection with any stockholder rights plan, (vi) purchases of capital stock or options to acquire such capital stock with the proceeds received from a substantially concurrent issuance of capital stock or convertible securities, (vii) purchases of capital stock pledged as collateral for loans to employees, and (viii) purchases of capital stock in connection with the exercise of stock options or stock appreciation rights by way of cashless exercise or in connection with the satisfaction of withholding tax obligations.
7.7 Investments. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries to do so, other than Permitted Investments, or maintain or invest any of its property with a Person other than Bank or Banks Affiliates or permit any Subsidiary to do so unless such Person has entered into a control agreement with Bank, in form and substance satisfactory to Bank, or suffer or permit any Subsidiary to be a party to, or be bound by, an agreement that restricts such Subsidiary from paying dividends or otherwise distributing property to Borrower. Further, Borrower shall not enter into any license or agreement with any Prohibited Territory or with any Person organized under or doing business (concerning Borrowers products) in a Prohibited Territory.
7.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower, except for (a) sales of equity securities to existing investors, incurrence of Subordinated Debt owed to existing investors and other transactions that are in the ordinary course of Borrowers business, upon fair and reasonable terms (when viewed in the context of any series of transactions of which it may be a part, if applicable) that are no less favorable to Borrower than would be obtained in an arms length transaction with a non-affiliated Person; (b) transactions among Borrower and its Subsidiaries and among Borrowers Subsidiaries so long as no Event of Default exists or could reasonably be expected to result therefrom; (c) reasonable and customary fees paid to members of Borrowers Board of Directors in the ordinary course of Borrowers business; and (d) employment arrangements in the ordinary course of Borrowers business.
7.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
and the terms of the subordination agreement relating to such Subordinated Debt, or amend any provision of any document evidencing such Subordinated Debt, except in compliance with the terms of the subordination agreement relating to such Subordinated Debt, or amend any provision affecting Banks rights contained in any documentation relating to the Subordinated Debt without Banks prior written consent.
7.10 Inventory and Equipment. Subject to Section 6.11, store the Inventory or the Equipment (other than Inventory and Equipment with a book value not in excess of $250,000) with a bailee, warehouseman, or similar third party unless the third party has been notified of Banks security interest and Bank (a) has received an acknowledgment from the third party that it is holding or will hold the Inventory or Equipment for Banks benefit or (b) is in possession of the warehouse receipt, where negotiable, covering such Inventory or Equipment. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory and Equipment (other than Inventory and Equipment with a book value not in excess of $250,000) only at the location set forth in Section 10 and such other locations of which Borrower gives Bank prior written notice.
7.11 No Investment Company; Margin Regulation. Become or be controlled by an investment company, within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Credit Extension for such purpose.
7.12 Cerus BV Accounts. Allow Cerus BV to take any such action that results in the assignment, transfer, pledge, or other disposition of any of the following accounts established at ABN Amro: [ * ] or (ii) establish any other accounts other than accounts listed in this Section 7.12. In no event shall the aggregate balance of the accounts referenced in this Section 7.12 exceed (i)Three Million Dollars ($3,000,000) in the calendar year 2011 and (ii) such amounts to be determined annually thereafter upon consultation between Bank and Borrower; provided that, if Bank and Borrower are unable to mutually agree upon such amounts, such amounts shall not exceed Three Million Dollars ($3,000,000).
8. | EVENTS OF DEFAULT. |
Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay any of the Obligations when due;
8.2 Covenant Default.
(a) If Borrower fails to perform any obligation under Sections 6.2, 6.4, 6.5, 6.6 or 6.7, or violates any of the covenants contained in Article 7 of this Agreement; or
(b) If Borrower fails or neglects to perform or observe any other material term, provision, condition, covenant contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition or covenant that can be cured, has failed to cure such default within ten (10) days after Borrower receives notice thereof or any officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, so long as Borrower continues to diligently attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default but no Credit Extensions will be made;
8.3 Material Adverse Effect. If there occurs any circumstance or circumstances that could reasonably be expected to have a Material Adverse Effect;
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
8.4 Defective Perfection. If Bank shall receive at any time following the Closing Date an SOS Report indicating that except for Permitted Liens, Banks security interest in the Collateral is not prior to all other security interests or Liens of record reflected in the report; provided, Borrower shall have five (5) Business Days (or reasonable extension thereof, not to be unreasonably withheld) from notice or knowledge thereof to cure any such defective perfection, provided, further, this Event of Default shall not apply to the extent any such defective perfection has resulted from Banks gross negligence or willful misconduct;
8.5 Attachment. If any material portion of Borrowers assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrowers assets, or if a notice of lien, levy, or assessment is filed of record with respect to any material portion of Borrowers assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Credit Extensions will be made during such cure period);
8.6 Insolvency. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within forty-five (45) days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding);
8.7 Other Agreements. If there is a default or other failure to perform in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of One Hundred Fifty Thousand Dollars ($150,000) or that would reasonably be expected to have a Material Adverse Effect; provided, however, that the Event of Default under this Section 8.7 caused by the occurrence of a default under such other agreement shall be cured or waived for purposes of this Agreement upon Bank receiving written notice from the party asserting such default of such cure or waiver of the default under such other agreement, if at the time of such cure or waiver under such other agreement (x) Bank has not declared an Event of Default under this Agreement and/or exercised any rights with respect thereto; (y) any such cure or waiver does not result in an Event of Default under any other provision of this Agreement or any Loan Document; and (z) in connection with any such cure or waiver under such other agreement, the terms of any agreement with such third party are not modified or amended in any manner which could in the good faith judgment of Bank be materially less advantageous to Borrower;
8.8 Subordinated Debt. If Borrower makes any payment on account of Subordinated Debt, except to the extent the payment is allowed under any subordination agreement entered into with Bank;
8.9 Judgments; Settlements. If a final, non-appealable judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least One Hundred Fifty Thousand Dollars ($150,000) (not covered by independent third-party insurance as to which liability has been accepted by such insurance carrier) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of twenty (20) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of the judgment); or if a settlement or settlements is agreed upon for an amount individually or in the aggregate of at least One Hundred Fifty Thousand Dollars ($150,000) for which Borrower is required to pay.
8.10 Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document.
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
9. | BANKS RIGHTS AND REMEDIES. |
9.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.6 (insolvency), all Obligations shall become immediately due and payable without any action by Bank);
(b) Demand that Borrower (i) deposit cash with Bank in an amount equal to the amount of any Letters of Credit remaining undrawn, as collateral security for the repayment of any future drawings under such Letters of Credit, and (ii) pay in advance all Letter of Credit fees scheduled to be paid or payable over the remaining term of the Letters of Credit, and Borrower shall promptly deposit and pay such amounts;
(c) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank;
(d) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable;
(e) Make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may reasonably designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Banks determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrowers owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same in accordance with local laws, without charge, in order to exercise any of Banks rights or remedies provided herein, at law, in equity, or otherwise;
(f) Set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, and (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrowers labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Banks exercise of its rights under this Section 9.1, Borrowers rights under all licenses and all franchise agreements shall inure to Banks benefit;
(h) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrowers premises) as Bank determines is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate. Bank may sell the Collateral without giving any warranties as to the Collateral. Bank may specifically disclaim any warranties of title or the like. This procedure will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. If Bank sells any of the Collateral upon credit, Borrower will be credited only with payments actually made by the purchaser, received by Bank, and applied to the indebtedness of the purchaser. If the purchaser fails to pay for the Collateral, Bank may resell the Collateral and Borrower shall be credited with the proceeds of the sale;
(i) Bank may credit bid and purchase at any public sale;
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(j) Apply for the appointment of a receiver, trustee, liquidator or conservator of the Collateral, without notice and without regard to the adequacy of the security for the Obligations and without regard to the solvency of Borrower, any guarantor or any other Person liable for any of the Obligations; and
(k) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower.
Bank may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral.
9.2 Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Banks designated officers, or employees) as Borrowers true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Banks security interest in the Accounts; (b) endorse Borrowers name on any checks or other forms of payment or security that may come into Banks possession; (c) sign Borrowers name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims under and decisions with respect to Borrowers policies of insurance; (f) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; and (g) file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Borrower where permitted by law; provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in clause (g) above, regardless of whether an Event of Default has occurred. The appointment of Bank as Borrowers attorney in fact, and each and every one of Banks rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Banks obligation to provide advances hereunder is terminated.
9.3 Accounts Collection. At any time after the occurrence and during the continuation of an Event of Default, Bank may notify any Person owing funds to Borrower of Banks security interest in such funds and verify the amount of such Account. At any time after the occurrence and during the continuation of an Event of Default, Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Banks trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following after reasonable notice to Borrower: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Line as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.5 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement.
9.5 Banks Liability for Collateral. Bank has no obligation to clean up or otherwise prepare the Collateral for sale. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 No Obligation to Pursue Others. Bank has no obligation to attempt to satisfy the Obligations by collecting them from any other person liable for them and Bank may release, modify or waive any collateral provided by any other Person to secure any of the Obligations, all without affecting Banks rights against Borrower. Borrower waives any right it may have to require Bank to pursue any other Person for any of the Obligations.
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
9.7 Remedies Cumulative. Banks rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrowers part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. Borrower expressly agrees that this Section 9.7 may not be waived or modified by Bank by course of performance, conduct, estoppel or otherwise.
9.8 Demand; Protest. Except as otherwise provided in this Agreement, Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment and any other notices relating to the Obligations.
10. | NOTICES. |
Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below:
If to Borrower: |
CERUS CORPORATION | |
2550 Stanwell Drive | ||
Concord, CA 94520 | ||
Attn: Chief Legal Officer | ||
FAX: (925) 288-6278 | ||
If to Bank: |
Comerica Bank | |
M/C 7578 | ||
39200 Six Mile Rd. | ||
Livonia, MI 48152 | ||
Attn: National Documentation Services | ||
with a copy to: |
Comerica Bank | |
250 Lytton Ave., 3rd Floor | ||
Palo Alto, CA 94301 | ||
Attn: Brian G. Demmert, Senior Vice President | ||
FAX: (650) 462-6049 |
The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other.
11. | CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. |
This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the State and Federal courts located in the State of California. THE UNDERSIGNED ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED UNDER CERTAIN CIRCUMSTANCES. TO THE EXTENT PERMITTED BY LAW, EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS, HIS OR HER CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF ALL PARTIES, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OTHER DOCUMENT, INSTRUMENT OR AGREEMENT BETWEEN THE UNDERSIGNED PARTIES.
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
12. | REFERENCE PROVISION. |
12.1 In the event the Jury Trial Waiver set forth above is not enforceable, the parties elect to proceed under this Judicial Reference Provision.
12.2 With the exception of the items specified in Section 12.3, below, any controversy, dispute or claim (each, a Claim) between the parties arising out of or relating to this Agreement or any other document, instrument or agreement between the undersigned parties (collectively in this Section, the Loan Documents), will be resolved by a reference proceeding in California in accordance with the provisions of Sections 638 et seq. of the California Code of Civil Procedure (CCP), or their successor sections, which shall constitute the exclusive remedy for the resolution of any Claim, including whether the Claim is subject to the reference proceeding. Except as otherwise provided in the Loan Documents, venue for the reference proceeding will be in the Superior Court in the County where the real property involved in the action, if any, is located or in a County where venue is otherwise appropriate under applicable law (the Court).
12.3 The matters that shall not be subject to a reference are the following: (i) foreclosure of any security interests in real or personal property, (ii) exercise of selfhelp remedies (including, without limitation, set-off), (iii) appointment of a receiver and (iv) temporary, provisional or ancillary remedies (including, without limitation, writs of attachment, writs of possession, temporary restraining orders or preliminary injunctions). This Agreement does not limit the right of any party to exercise or oppose any of the rights and remedies described in clauses (i) and (ii) or to seek or oppose from a court of competent jurisdiction any of the items described in clauses (iii) and (iv). The exercise of, or opposition to, any of those items does not waive the right of any party to a reference pursuant to this Agreement.
12.4 The referee shall be a retired Judge or Justice selected by mutual written agreement of the parties. If the parties do not agree within ten (10) days of a written request to do so by any party, then, upon request of any party, the referee shall be selected by the Presiding Judge of the Court (or his or her representative). A request for appointment of a referee may be heard on an ex parte or expedited basis, and the parties agree that irreparable harm would result if ex parte relief is not granted.
12.5 The parties agree that time is of the essence in conducting the reference proceedings. Accordingly, the referee shall be requested, subject to change in the time periods specified herein for good cause shown, to (i) set the matter for a status and trial-setting conference within fifteen (15) days after the date of selection of the referee, (ii) if practicable, try all issues of law or fact within one hundred twenty (120) days after the date of the conference and (iii) report a statement of decision within twenty (20) days after the matter has been submitted for decision.
12.6 The referee will have power to expand or limit the amount and duration of discovery. The referee may set or extend discovery deadlines or cutoffs for good cause, including a partys failure to provide requested discovery for any reason whatsoever. Unless otherwise ordered based upon good cause shown, no party shall be entitled to priority in conducting discovery, depositions may be taken by either party upon seven (7) days written notice, and all other discovery shall be responded to within fifteen (15) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding.
12.7 Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee, and the referee will be provided a courtesy copy of the transcript. The party making such a request shall have the obligation to arrange for and pay the court reporter. Subject to the referees power to award costs to the prevailing party, the parties will equally share the cost of the referee and the court reporter at trial.
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12.8 The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, enter equitable orders that will be binding on the parties and rule on any motion which would be authorized in a court proceeding, including without limitation motions for summary judgment or summary adjudication. The referee shall issue a decision at the close of the reference proceeding which disposes of all claims of the parties that are the subject of the reference. Pursuant to CCP § 644, such decision shall be entered by the Court as a judgment or an order in the same manner as if the action had been tried by the Court and any such decision will be final, binding and conclusive. The parties reserve the right to appeal from the final judgment or order or from any appealable decision or order entered by the referee. The parties reserve the right to findings of fact, conclusions of laws, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision.
12.9 If the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by reference procedure will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge or Justice, in accordance with the California Arbitration Act §1280 through §1294.2 of the CCP as amended from time to time. The limitations with respect to discovery set forth above shall apply to any such arbitration proceeding.
12.10 THE PARTIES RECOGNIZE AND AGREE THAT ALL CONTROVERSIES, DISPUTES AND CLAIMS RESOLVED UNDER THIS REFERENCE PROVISION WILL BE DECIDED BY A REFEREE AND NOT BY A JURY. AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS, HIS OR HER OWN CHOICE, EACH PARTY KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF ALL PARTIES, AGREES THAT THIS REFERENCE PROVISION WILL APPLY TO ANY CONTROVERSY, DISPUTE OR CLAIM BETWEEN OR AMONG THEM ARISING OUT OF OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS.
13. | GENERAL PROVISIONS. |
13.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties and shall bind all persons who become bound as a debtor to this Agreement; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Banks prior written consent, which consent may be granted or withheld in Banks sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Banks obligations, rights and benefits hereunder.
13.2 Indemnification. Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement and/or the Loan Documents; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank, its officers, employees and agents as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Banks gross negligence or willful misconduct. Notwithstanding the foregoing, (i) Bank Expenses incurred through the Closing Date (and to complete the post-closing items listed in Section 6.11 or the Closing Checklist) shall not to exceed Fifty Thousand Dollars ($50,000) for the account of Borrower; and (ii) if, prior to the Growth Capital Maturity Date, Bank and Borrower enter into an amendment to this Agreement which has as its sole purpose an increase of the Credit Extensions to Twelve Million Dollars ($12,000,000), no fees or Bank Expenses shall be due or payable by Borrower in connection with such amendment.
13.3 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement.
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
13.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.
13.5 Correction of Loan Documents. Bank may correct patent errors and fill in any blanks in this Agreement and the other Loan Documents consistent with the agreement of the parties; provided that Bank provides Borrower with written notice of such correction and allows Borrower at least ten (10) days to object to such correction. In the event of such objection, such correction shall not be made to the Loan Documents except by an amendment signed by both Bank and Borrower.
13.6 Amendments in Writing, Integration. All amendments to or terminations of this Agreement or the other Loan Documents must be in writing signed by the parties. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement and the other Loan Documents, if any, are merged into this Agreement and the Loan Documents.
13.7 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement.
13.8 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations (other than contingent indemnification obligations) remain outstanding or Bank has any obligation to make any Credit Extension to Borrower. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 13.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run.
13.9 Confidentiality. In handling any confidential information, Bank and all employees and agents of Bank shall exercise the same degree of care that Bank exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or Affiliates of Bank in connection with their present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the Loans, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Bank, (v) to Banks accountants, auditors and regulators, and (vi) as Bank may determine in connection with the enforcement of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information.
{Balance of Page Intentionally Left Blank}
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.
CERUS CORPORATION | ||
By: |
/s/ Kevin D. Green | |
Name: |
Kevin D. Green | |
Title: |
V.P. Finance & CAO | |
COMERICA BANK | ||
By: |
/s/ Brian Demmert | |
Name: |
Brian Demmert | |
Title: |
SVP |
{Signature Page to Loan and Security Agreement}
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
EXHIBIT A
DEFINITIONS
Accounts means all presently existing and hereafter arising accounts, contract rights, payment intangibles and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrowers Books relating to any of the foregoing.
Advance or Advances means a cash advance or cash advances under the Revolving Line.
Affiliate means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Persons senior executive officers, directors, and partners.
Bank Expenses means all reasonable costs or expenses (including reasonable attorneys fees and expenses, whether generated in-house or by outside counsel) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; reasonable Collateral audit fees; and Banks reasonable attorneys fees and expenses (whether generated in-house or by outside counsel) incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal), incurred before, during and after an Insolvency Proceeding, whether or not suit is brought.
Borrower State means Delaware, the state under whose laws Borrower is organized.
Borrowers Books means all of Borrowers books and records including: ledgers; records concerning Borrowers assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information.
Borrowing Base means an amount equal to eighty percent (80%) of Eligible Accounts, as reasonably determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower.
Business Day means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close.
Cash means unrestricted cash and cash equivalents.
Cerus B.V. means Cerus Europe B.V., an entity organized under the laws of the Netherlands and a wholly-owned Subsidiary of Borrower.
Change in Control shall mean a transaction in which any person or group (within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of a sufficient number of shares of all classes of stock then outstanding of Borrower ordinarily entitled to vote in the election of directors, empowering such person or group to elect a majority of the Board of Directors of Borrower, who did not have such power before such transaction.
Chief Executive Office State means California, where Borrowers chief executive office is located.
Closing Date means the date of this Agreement.
Code means the California Uniform Commercial Code as amended or supplemented from time to time.
Collateral means the property described on Exhibit B attached hereto and all Negotiable Collateral to the extent not described on Exhibit B, except to the extent any such property (i) is nonassignable by its terms without the
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
consent of the licensor thereof or another party (but only to the extent such prohibition on transfer is enforceable under applicable law, including, without limitation, Sections 9406 and 9408 of the Code), (ii) the granting of a security interest therein is contrary to applicable law, provided that upon the cessation of any such restriction or prohibition, such property shall automatically become part of the Collateral, or (iii) constitutes the capital stock of a controlled foreign corporation (as defined in the IRC), in excess of sixty five percent (65%) of the voting power of all classes of capital stock of such controlled foreign corporations entitled to vote; provided that in no case shall the definition of Collateral exclude any Accounts, proceeds of the disposition of any property, or general intangibles consisting of rights to payment.
Collateral Assignment is that certain Collateral Assignment of Commissionaire Agreement by Borrower in favor of Bank and acknowledged and agreed to by Cerus B.V., dated as of the Closing Date.
Collateral State means the state or states where the Collateral is located, which are California, Michigan, Georgia, Pennsylvania and Massachusetts.
Commissionaire Agreement is that certain Commissionaire Agreement between Borrower and Cerus B.V. dated as of January 1, 2007, as amended.
Contingent Obligation means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit, corporate credit cards or merchant services issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term Contingent Obligation shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement.
Copyrights means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held.
Credit Extension means each Advance, Growth Capital Advance or any other extension of credit by Bank to or for the benefit of Borrower hereunder.
Deeds of Pledge means that certain Agreement and Deed of First Right of Pledge, that certain Disclosed Deed of Pledge of Bank Account Receivables and that certain Undisclosed Deed of Pledge of Moveable Assets, and such other documents or instruments reasonably determined by Bank to be necessary in connection therewith; each in form and content reasonably acceptable to Bank.
Dutch Organizational Documents is the Articles of Association, a copy of the shareholders register and the trade register of Cerus B.V., an Amendment to the Articles of Association (revised to permit the transfer of voting rights to a pledgee) and such other documents related thereto as Bank may reasonably request.
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
Eligible Accounts means those Accounts that arise in the ordinary course of Borrowers business that comply with all of Borrowers representations and warranties to Bank set forth in Section 5.3 and are supported by credit insurance acceptable to Bank; provided, that Bank may change the standards of eligibility, based upon the results of audits of the Collateral and/or field examinations, and/or Events of Default, by giving Borrower thirty (30) days prior written notice. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following:
(a) | Accounts that the account debtor has failed to pay in full within one hundred twenty (120) days of invoice date; |
(b) | Credit balances over ninety (90) days; |
(c) | Accounts with respect to an account debtor, thirty-five percent (35%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date; |
(d) | Accounts with respect to an account debtor, including Subsidiaries and Affiliates, whose total obligations to Borrower exceed thirty percent (30%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank; |
(e) | Accounts with respect to which the account debtor does not have its principal place of business in the United States, except for Eligible Foreign Accounts; |
(f) | Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States, except for Accounts of the United States if the payee has assigned its payment rights to Bank and the assignment has been acknowledged under the Assignment of Claims Act of 1940 (31 U.S.C. 3727); or Accounts of military purchasers or generated by the sale or provision of defense articles; |
(g) | Accounts with respect to which Borrower is liable to the account debtor for goods sold or services rendered by the account debtor to Borrower, but only to the extent of any amounts owing to the account debtor against amounts owed to Borrower; |
(h) | Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, demo or promotional, or other terms by reason of which the payment by the account debtor may be conditional; |
(i) | Accounts with respect to which the account debtor is an officer, employee, agent or Affiliate of Borrower; |
(j) | Accounts that have not yet been billed to the account debtor or that relate to deposits (such as good faith deposits) or other property of the account debtor held by Borrower for the performance of services or delivery of goods which Borrower has not yet performed or delivered; |
(k) | Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; |
(l) | Accounts the collection of which Bank reasonably determines after inquiry and consultation with Borrower to be doubtful; and |
(m) | Retentions and hold-backs. |
Eligible Foreign Accounts means Accounts with respect to which the account debtor does not have its principal place of business in the United States and is not located in an OFAC sanctioned country and that are (i) supported by credit insurance, or one or more letters of credit in an amount and of a tenor, and issued by a financial institution, in each case, acceptable to Bank, (ii) generated by an account debtor with its principal place of business in Canada,
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
provided that the Bank has perfected its security interest in the appropriate Canadian province, or (iii) approved by Bank on a case-by-case basis. All Eligible Foreign Accounts must be calculated in U.S. Dollars, determined as of the date of the request for an Advance or the reporting date set forth in a Borrowing Base Certificate, as applicable.
Environmental Laws means all laws, rules, regulations, orders and the like issued by any federal state, local foreign or other governmental or quasi-governmental authority or any agency pertaining to the environment or to any hazardous materials or wastes, toxic substances, flammable, explosive or radioactive materials, asbestos or other similar materials.
Equipment means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest.
ERISA means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder.
Event of Default has the meaning assigned in Article 8.
Existing Indebtedness means the indebtedness of Borrower to Oxford Finance LLC in the aggregate principal outstanding amount as of the Closing Date of approximately Four Million Two Hundred Seventy Three Thousand Nine Hundred Twenty and 20/100 Dollars ($4,273,920.20) pursuant to that certain Loan and Security Agreement, dated as of March 31, 2010, entered into by and between Oxford and Borrower.
Final Payment is a payment (in addition to and not a substitution for the regular monthly payments of principal plus accrued interest) due and payable to Bank on the earliest to occur of (a) the Growth Capital Maturity Date, or (b) the acceleration of the Growth Capital Advances, or (c) the prepayment of the Growth Capital Advances pursuant to Section 2.1(c)(iv), equal to one percent (1.00%) of the Growth Capital Line.
GAAP means generally accepted accounting principles, consistently applied, as in effect from time to time.
Growth Capital Advance(s) means a cash advance or cash advances under the Growth Capital Line.
Growth Capital Line means a Credit Extension of up to Eight Million Dollars ($8,000,000), including Tranche A Growth Capital Advances and Tranche B Growth Capital Advances; provided that the aggregate amount of Advances and Growth Capital Advances shall not at any time exceed the principal sum of Ten Million Dollars ($10,000,000).
Growth Capital Maturity Date means September 30, 2015.
Indebtedness means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations, and (d) all Contingent Obligations.
Insolvency Proceeding means any proceeding commenced by or against any Person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.
Intellectual Property means all of Borrowers right, title, and interest in and to the following:
(n) | Copyrights, Trademarks and Patents; |
(o) | Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; |
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(p) | Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; |
(q) | Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; |
(r) | All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights; and |
(s) | All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents. |
Inventory means all present and future inventory in which Borrower has any interest.
Investment means any beneficial ownership of (including stock, partnership or limited liability company interest or other securities) any Person, or any loan, advance or capital contribution to any Person.
IRC means the Internal Revenue Code of 1986, as amended, and the regulations thereunder.
Letter of Credit means a commercial or standby letter of credit or similar undertaking issued by Bank at Borrowers request.
Lien means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance.
Loan Documents means, collectively, this Agreement, the Deeds of Pledge, the Collateral Assignment, any note or notes executed by Borrower, and any other document, instrument or agreement entered into in connection with this Agreement, all as amended or extended from time to time.
Material Adverse Effect means (i) a material adverse change in Borrowers business or financial condition, or (ii) a material impairment in the prospect of repayment of all or any portion of the Obligations or in otherwise performing Borrowers obligations under the Loan Documents, (iii) a material impairment in the perfection, value or priority of Banks security interests in the Collateral.
Negotiable Collateral means all of Borrowers present and future letters of credit of which it is a beneficiary, drafts, instruments (including promissory notes), securities, documents of title, and chattel paper, and Borrowers Books relating to any of the foregoing.
Obligations means all debt, principal, interest, Bank Expenses, the Final Payment and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise.
Patents means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.
Periodic Payments means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank.
Permitted Indebtedness means:
(a) | Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; |
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(b) | (i) any Indebtedness that does not exceed $100,000 in principal amount existing on the Closing Date, and (ii) any Indebtedness in excess of $100,000 in principal amount existing on the Closing Date and shown on the Schedule; |
(c) | Subordinated Debt; |
(d) | unsecured Indebtedness to trade creditors incurred in the ordinary course of business; |
(e) | capitalized leases and purchase money Indebtedness not to exceed $100,000 in the aggregate in any fiscal year which are either unsecured or secured by Permitted Liens; |
(f) | any obligations with respect to corporate credit cards or merchant services issued for the account of Borrower or any Subsidiary in an aggregate amount not to exceed $125,000; |
(g) | without duplication with clause (h) of the definition of Permitted Investment, all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect Borrower or a Subsidiary against fluctuation in interest rates, currency exchange rates or commodity prices; in an aggregate notional amount not to exceed $100,000; |
(h) | Indebtedness relating to the financing of insurance premiums in an aggregate amount not to exceed $350,000; |
(i) | Reimbursement obligations pursuant to a bond in favor of PG&E in an aggregate amount not to exceed $65,000; and |
(j) | refinanced Permitted Indebtedness, provided that the amount of such Indebtedness is not increased except by an amount equal to a reasonable premium or other reasonable amount paid in connection with such refinancing and by an amount equal to any existing, but unutilized, commitment thereunder. |
Permitted Investment means:
(a) | Investments existing on the Closing Date disclosed in the Schedule; |
(b) | Investments permitted by Borrowers investment policy, as amended from time to time, provided that such investment policy (and any amendment thereto) has been approved by Bank; |
(c) | Investments (i) by Borrower in Subsidiaries (other than Cerus B.V.) not to exceed $250,000 in the aggregate in any fiscal year; (ii) by Borrower in Cerus B.V. not to exceed $250,000 in the aggregate in any fiscal year; and (iii) by Subsidiaries in other Subsidiaries not to exceed $250,000 in the aggregate in any fiscal year or in Borrower; |
(d) | Investments consisting of deposit, securities and/or commodities accounts (collectively, Collateral Accounts) in the name of Borrower or any Subsidiary so long as Bank has a first priority, perfected security interest in such Collateral Accounts; |
(e) | Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; |
(f) | Investments permitted by Sections 7.1, 7.3 and 7.6; |
(g) | Investments, not to exceed $10,000 in the aggregate at any time outstanding, consisting of travel advances and other employee loans and advances in the ordinary course of business |
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(h) | Without duplication with clause (g) of the definition of Permitted Indebtedness, Investments constituting interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect Borrower or a Subsidiary against fluctuation in interest rates, currency exchange rates or commodity prices; in an aggregate notional amount not to exceed $100,000; and |
(i) | Investments in joint ventures or strategic alliances in the ordinary course of Borrowers business consisting of the non-exclusive licensing of technology and licensing that may be exclusive in respects other than territory and that may be exclusive as to territory only as to discreet geographical areas outside of the United States, the development of technology or the providing of technical support, provided that any cash investments by Borrower do not exceed $250,000 in the aggregate in any fiscal year. |
Permitted Liens means the following:
(a) | (i) Liens securing Permitted Indebtedness described under clause (b) of the definition of Permitted Indebtedness; (ii) Liens arising under this Agreement or other Loan Documents; and (iii); other existing Liens shown on the Schedule; |
(b) | Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, provided that no notice of any such Lien has been filed or recorded under the Internal Revenue Code of 1986, as amended, and the Treasury Regulations adopted thereunder; |
(c) | Liens (including with respect to capital leases) (i) on property (including accessions, additions, parts, replacements, fixtures, improvements and attachments thereto, and the proceeds thereof) acquired or held by Borrower or its Subsidiaries incurred for financing such property (including accessions, additions, parts, replacements, fixtures, improvements and attachments thereto, and the proceeds thereof) other than Accounts, Inventory, and financed Equipment, or (ii) existing on property (and accessions, additions, parts, replacements, fixtures, improvements and attachments thereto, and the proceeds thereof) when acquired other than Accounts, Inventory, and financed Equipment, if the Lien is confined to such property (including accessions, additions, parts, replacements, fixtures, improvements and attachments thereto, and the proceeds thereof); in each case, not to exceed $100,000 in the aggregate in any fiscal year; |
(d) | Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (c), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness it secures may not increase; |
(e) | leases or subleases of real property granted in the ordinary course of Borrowers business, and leases, subleases, non-exclusive licenses or sublicenses of personal property (other than Intellectual Property) granted in the ordinary course of Borrowers business, if the leases, subleases, licenses and sublicenses do not prohibit granting Bank a security interest therein; |
(f) | non-exclusive license of Intellectual Property granted to third parties in the ordinary course of business, and licenses of Intellectual Property that could not result in a legal transfer of title of the licensed property that may be exclusive in respects other than territory and that may be exclusive as to territory only as to discreet geographical areas outside of the United States; |
(g) | leases or subleases granted in the ordinary course of Borrowers business, including in connection with Borrowers leased premises or leased property; |
(h) | Liens in favor of other financial institutions arising in connection with Borrowers deposit accounts held at such institutions to secure standard fees for deposit services charged by, but not financing made available by such institutions, provided that Bank has a perfected security interest in the amounts held in such deposit accounts; |
7
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(i) | Liens of carriers, warehousemen, suppliers, or other Persons that are possessory in nature arising in the ordinary course of business so long as such Liens attach only to Inventory, securing liabilities in the aggregate amount not to exceed $250,000 and which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto; |
(j) | Liens to secure payment of workers compensation, employment insurance, old-age pensions, social security and other like obligations incurred in the ordinary course of business (other than Liens imposed by ERISA); |
(k) | rights of customers and scientists with respect to illuminators placed in the possession of such customers and scientists in the ordinary course of business; |
(l) | Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Sections 8.5 or 8.9; |
(m) | Liens incurred or deposits made in the ordinary course of Borrowers or a Subsidiarys business, securing liabilities in the aggregate amount not to exceed $250,000 to secure the performance of tenders, statutory obligations, surety, bid and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations; |
(n) | Liens comprised of security deposits or bank guarantees in favor of landlords, not to exceed the aggregate amount of $110,000; |
(o) | Liens in favor of governmental agencies securing radiological decommissioning not to exceed $250,000; and |
(p) | Liens securing the financing of insurance premiums and hedging agreements permitted under clauses (g) and (h) of the defined term Permitted Indebtedness; provided that such liens are limited to (x) with respect to the financing of insurance premiums, the proceeds of insurance policies so financed; and (y) with respect to hedging agreements, specific collateral pledged with respect to such hedging agreements (as agreed to by Bank in its reasonable discretion). |
Permitted Transfer means the conveyance, sale, lease, transfer or disposition by Borrower or any Subsidiary of:
(a) | Inventory in the ordinary course of business; |
(b) | Worn-out, obsolete or surplus Equipment; |
(c) | in connection with Permitted Liens and Permitted Investments; |
(d) | non-exclusive licenses of Intellectual Property granted to third parties in the ordinary course of business, and licenses of Intellectual Property that could not result in a legal transfer of title of the licensed property that may be exclusive in respects other than territory and that may be exclusive as to territory only as to discreet geographical areas outside of the United States; |
(e) | transfers from any Subsidiary of Borrower to Borrower; and |
(f) | the sale by, and leaseback to, Borrower of laboratory equipment. |
Person means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency.
8
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
Pricing Addendum means the Prime Referenced Rate Addendum attached hereto as Exhibit F, signed by Borrower and Bank and dated as of the Closing Date.
Prime Rate means the variable rate of interest, per annum, most recently announced by Bank, as its prime rate, whether or not such announced rate is the lowest rate available from Bank.
Prohibited Territory means any person or country listed by the Office of Foreign Assets Control of the United States Department of Treasury as to which transactions between a United States Person and that territory are prohibited.
Required Bailee means, as of the Closing Date, each of the following: (1) DHL Excel Supply Chain; (2) Fenwal France SAS; (3) Nova BioMedical; (4) Ash Stevens, Inc.; (5) Porex; and (6) Conworx Technology GmbH.
Responsible Officer means each of the Chief Executive Officer, the Chief Legal Officer, and the Chief Financial Officer of Borrower.
Restricted License is any material license or other agreement with respect to which Borrower is the licensee (a) that prohibits or otherwise restricts Borrower from granting a security interest in Borrowers interest in such license or agreement or any other property, or (b) for which a default under or termination of could interfere with the Banks right to sell any Collateral.
Revolving Line means a Credit Extension of up to Four Million Dollars ($4,000,000); provided that (i) the amount of the Revolving Line may increase by any portion of the Growth Capital Line which is not advanced by Bank to Borrower under Tranche A and Tranche B; and (ii) the aggregate amount of Advances and Growth Capital Advances shall not at any time exceed Ten Million Dollars ($10,000,000).
Revolving Maturity Date means September 30, 2013.
Schedule means the schedule of exceptions set forth in a Disclosure Letter dated as of the date hereof and approved by Bank, if any.
Shares means (i) sixty-five percent (65%) of the issued and outstanding capital stock, membership units or other securities owned or held of record by Borrower in any Subsidiary of Borrower which is not an entity organized under the laws of the United States or any territory thereof, and (ii) one hundred percent (100%) of the issued and outstanding capital stock, membership units or other securities owned or held of record by Borrower in any Subsidiary of Borrower which is an entity organized under the laws of the United States or any territory thereof.
SOS Reports means the official reports from the Secretaries of State of each Collateral State, Chief Executive Office State and the Borrower State and other applicable federal, state or local government offices identifying all current security interests filed in the Collateral and Liens of record as of the date of such report.
Subordinated Debt means any debt incurred by Borrower that is subordinated in writing to the debt owing by Borrower to Bank on terms reasonably acceptable to Bank (and identified as being such by Borrower and Bank).
Subsidiary means any corporation, partnership or limited liability company or joint venture in which (i) any general partnership interest or (ii) more than fifty percent (50%) of the stock, limited liability company interest or joint venture of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity, at the time as of which any determination is being made, is owned by Borrower, either directly or through an Affiliate.
Trademarks means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks.
9
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
Tranche A has the meaning assigned in Section 2.1(c)(i).
Tranche A Availability End Date means September 30, 2011.
Tranche A Growth Capital Advance means an advance under the Growth Capital Line of Five Million Dollars ($5,000,000).
Tranche A Interest Only End Date means the date twelve (12) months from the funding date of the Tranche A Growth Capital Advance.
Tranche B has the meaning assigned in Section 2.1(c)(i).
Tranche B Availability Date means December 31, 2011; provided Borrower is, as of the date of the request for, and the funding of, the Tranche B Growth Capital Advance, in compliance with Section 6.7(b) hereof for the trailing six (6) months.
Tranche B Availability End Date means June 30, 2012.
Tranche B Growth Capital Advance means an advance under the Growth Capital Line of Three Million Dollars ($3,000,000).
Tranche B Interest Only End Date means six (6) months after the funding date of the Tranche B Growth Capital Advance.
10
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
DEBTOR | CERUS CORPORATION | |
SECURED PARTY: | COMERICA BANK |
EXHIBIT B
COLLATERAL DESCRIPTION ATTACHMENT TO LOAN AND SECURITY AGREEMENT
All personal property of Borrower (herein referred to as Borrower or Debtor) whether presently existing or hereafter created or acquired, and wherever located, including, but not limited to:
All personal property of Debtor of every kind, whether presently existing or hereafter created or acquired, and wherever located, including but not limited to: (a) all accounts (including health-care-insurance receivables), chattel paper (including tangible and electronic chattel paper), deposit accounts, documents (including negotiable documents), equipment (including all accessions and additions thereto), general intangibles (including payment intangibles and software; excluding Intellectual Property), goods (including fixtures), instruments (including promissory notes), inventory (including all goods held for sale or lease or to be furnished under a contract of service, and including returns and repossessions), investment property (including securities and securities entitlements), letter of credit rights, money, and all of Debtors books and records with respect to any of the foregoing, and the computers and equipment containing said books and records; and (b) any and all cash proceeds and/or noncash proceeds thereof, including, without limitation, insurance proceeds, and all supporting obligations and the security therefor or for any right to payment. All terms above have the meanings given to them in the California Uniform Commercial Code, as amended or supplemented from time to time.
Notwithstanding the foregoing, the Collateral shall not include (i) any copyrights, patents, trademarks, servicemarks and applications therefor, now owned or hereafter acquired, or any claims for damages by way of any past, present and future infringement of any of the foregoing (collectively, the Intellectual Property); provided, however, that the Collateral shall include all accounts and general intangibles that consist of rights to payment from the sale, licensing or disposition of all or any part of, or rights in, the Intellectual Property (the Rights to Payment); (ii) more than 65% of the presently existing and hereafter arising, issued and outstanding shares of capital stock owned by Borrower or any Subsidiary organized outside the United States which Shares entitle the holder thereof to vote for directors or any other matter, and (iii) the Fenwal license agreement. Notwithstanding the foregoing, if a judicial authority (including a U.S. Bankruptcy Court) holds that a security interest in the underlying Intellectual Property is necessary to have a security interest in the Rights to Payment, then the Collateral shall automatically, and effective as of September 30, 2011, include the Intellectual Property to the extent necessary to permit perfection of Banks security interest in the Rights to Payment.
11
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
EXHIBIT C
TECHNOLOGY & LIFE SCIENCES DIVISION
LOAN ANALYSIS
LOAN ADVANCE/PAYDOWN REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00* P.M., P.S.T.
DEADLINE FOR EQUIPMENT ADVANCES IS 3:00 P.M., P.S.T.**
DEADLINE FOR WIRE TRANSFERS IS 1:30 P.M., P.S.T.
*At month end and the day before a holiday, the cut off time is 1:30 P.M., P.S.T.
**Subject to 3 day advance notice.
To: Loan Analysis FAX #: (650) 462-6061 |
DATE: ________________ | TIME: ____________ |
FROM: __________________________________ Borrowers Name |
TELEPHONE REQUEST (For Bank Use Only): | |
FROM: __________________________________ Authorized Signers Name |
The following person is authorized to request the loan payment transfer/loan advance on the designated account and is known to me. | |
FROM: __________________________________ Authorized Signature (Borrower) |
________________________________________ Authorized Request & Phone # | |
PHONE #: __________________________________ | ________________________________________ Received by (Bank) & Phone # | |
FROM ACCOUNT#: __________________________________ (please include Note number, if applicable) TO ACCOUNT #: __________________________________ (please include Note number, if applicable) |
________________________________________ Authorized Signature (Bank) | |
REQUESTED TRANSACTION TYPE | REQUESTED DOLLAR AMOUNT | For Bank Use Only | ||
PRINCIPAL INCREASE* (ADVANCE) | $____________________________________ | Date Recd: | ||
PRINCIPAL PAYMENT (ONLY) | $____________________________________ | Time: Comp. Status: YES NO Status Date: Time: Approval: | ||
OTHER INSTRUCTIONS: |
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_____________________________________________________________________________ | ||||
_____________________________________________________________________________ | ||||
_____________________________________________________________________________ | ||||
All representations and warranties of Borrower stated in the Loan Agreement are true, correct and complete in all material respects as of the date of the telephone request for and advance confirmed by this Loan Advance/Paydown Request Form and the attached Borrowing Base Certificate; provided, however, that those representations and warranties the date expressly referring to another date shall be true, correct and complete in all material respects as of such date.
*IS THERE A WIRE REQUEST TIED TO THIS LOAN ADVANCE? (PLEASE CIRCLE ONE) | YES | NO |
If YES, the Outgoing Wire Transfer Instructions must be completed below.
OUTGOING WIRE TRANSFER INSTRUCTIONS | Fed Reference Number
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Bank Transfer Number
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The items marked with an asterisk (*) are required to be completed. | ||||||
*Beneficiary Name | ||||||
*Beneficiary Account Number | ||||||
*Beneficiary Address | ||||||
Currency Type | US DOLLARS ONLY | |||||
*ABA Routing Number (9 Digits) | ||||||
*Receiving Institution Name | ||||||
*Receiving Institution Address | ||||||
*Wire Amount | $ |
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
EXHIBIT D
BORROWING BASE CERTIFICATE
Borrower: CERUS CORPORATION | Bank: | Comerica Bank | ||||
Commitment Amount: $4,000,000* | Technology & Life Sciences Division | |||||
Loan Analysis Department | ||||||
250 Lytton Avenue | ||||||
3rd Floor, MC 4240 | ||||||
Palo Alto, CA 94301 | ||||||
Phone: (650) 462-6060 | ||||||
Fax: (650) 462-6061 |
ACCOUNTS RECEIVABLE | ||||||||
1. | Accounts Receivable Book Value as of | |||||||
2. | Additions (please explain on reverse) | |||||||
3. | TOTAL ACCOUNTS RECEIVABLE AS OF __________________ | $_____________ | ||||||
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) | ||||||||
4. | Amounts over 120 days | $_____________ | ||||||
5. | Credit Balances over 90 days | $_____________ | ||||||
6. | Balance of 35% over 90 day | $_____________ | ||||||
7. | Concentration limits 30% | $_____________ | ||||||
8. | Foreign Accounts (other than Eligible Foreign Accounts)** | $_____________ | ||||||
9. | U.S. Governmental Accounts | $_____________ | ||||||
10. | Contra Accounts | $_____________ | ||||||
11. | Promotion or Demo Accounts | $_____________ | ||||||
12. | Intercompany/Employee Accounts | $_____________ | ||||||
13. | Other (please explain below) | $_____________ | ||||||
14. | TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS | $_____________ | ||||||
15. | Eligible Accounts (#3 minus #14) | $_____________ | ||||||
16. | LOAN VALUE OF ACCOUNTS RECEIVABLE(80% of #15) | $_____________ | ||||||
BALANCES | ||||||||
17. | Maximum Loan Amount | $4,000,000* | ||||||
18. | Total Funds Available (Lesser of #16 or #17) | $_____________ | ||||||
19. | Outstanding under Sublimits ( ) | $_____________ | ||||||
20. | Present balance owing on Line of Credit | $_____________ | ||||||
21. | Reserve Position (#18 minus #19 and #20) | $_____________ |
* | Subject to increase as provided in the Loan and Security Agreement. |
** | Explain on reverse/attachments. |
The undersigned represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Loan and Security Agreement between the undersigned and Comerica Bank.
Comments:
BANK USE ONLY | ||||||||||||
Recd By: |
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Date: |
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Reviewed By: |
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Date: |
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Authorized Signer |
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
EXHIBIT E
COMPLIANCE CERTIFICATE
Please send all Required Reporting to: | Comerica Bank | |
Technology & Life Sciences Division | ||
Loan Analysis Department | ||
Five Palo Alto Square, Suite 800 | ||
3000 El Camino Real | ||
Palo Alto, CA 94306 | ||
Phone: (650) 846-6820 | ||
Fax: (650) 462-6061 |
FROM: CERUS CORPORATION
The undersigned authorized Officer of CERUS CORPORATION (Borrower), hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the Agreement), (i)Borrower is in complete compliance for the period ending with all required covenants, including without limitation the ongoing registration of intellectual property rights in accordance with Section 6.8, except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof; provided, however, that those representatives and warranties expressly referring to an earlier date shall be true and correct in all material respects as of such date. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes.
Please indicate compliance status by circling Yes/No under Complies or Applicable column.
REPORTING COVENANTS |
REQUIRED |
COMPLIES | ||||
Company Prepared Monthly F/S | Monthly, within 30 days* | YES | NO | |||
Company Prepared Quarterly F/S; export order review | Quarterly (after the end of each of the first three calendar quarters), within 45 days | YES | NO | |||
Compliance Certificate | Monthly, within 30 days | YES | NO | |||
CPA Audited, Unqualified F/S | Annually, within 120 days of FYE | YES | NO | |||
Borrowing Base Cert., A/R & A/P Agings | Monthly, within 30 days | YES | NO | |||
Annual Business Plan (incl. operating budget) | By 1/31 | YES | NO | |||
Intellectual Property Report | Quarterly within 30 days | YES | NO | |||
Audit | Initial; Semi-annual | YES | NO | |||
10-Q | Quarterly, within 5 days of SEC filing (50 days) | YES | NO | |||
10-K | Annually, within 5 days of SEC filing (95 days) | YES | NO | |||
Total amount of Borrowers cash and investments | Amount: $_____________________________ | YES | NO | |||
Total amount of Borrowers cash and investments maintained with Bank | Amount: $_____________________________ | YES | NO | |||
REPORTING COVENANTS |
DESCRIPTION |
APPLICABLE | ||||
Legal Action > $150,000 (Sect. 6.2(iv)) | Notify promptly upon notice ____________ | YES | NO | |||
Inventory Disputes > $150,000 (Sect. 6.3) | Notify promptly upon notice ____________ | YES | NO | |||
Mergers & Acquisitions > $200,000 (Sect. 7.3) | Notify promptly upon notice ____________ | YES | NO | |||
Cross default with other agreements | Notify promptly upon notice ____________ | YES | NO | |||
> $150,000 (Sect. 8.7) | YES | NO | ||||
Judgment > $150,000 (Sect. 8.9) | Notify promptly upon notice ____________ | YES | NO |
* | other than 45 days after the (a) last day of each January and (b) the last day of each month following the last month of each fiscal quarter (i.e. for the months of April, July, and October). |
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
FINANCIAL COVENANTS |
REQUIRED | ACTUAL |
COMPLIES |
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TO BE TESTED MONTHLY, UNLESS OTHERWISE NOTED: |
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Minimum Cash |
$2,500,000 | $______________ | YES | NO | ||||||||
Minimum Revenues; Performance to Plan |
75% | ______________% | YES | NO | ||||||||
OTHER COVENANTS |
REQUIRED | ACTUAL |
COMPLIES |
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Permitted Indebtedness for equipment leases |
<$100,000 | ______________ | YES | NO | ||||||||
Permitted Investments for subsidiaries (incl. Cerus BV) |
<$250,000 | ______________ | YES | NO | ||||||||
Permitted Investments by/in subsidiaries |
<$250,000 | ______________ | YES | NO | ||||||||
Permitted Investments for employee loans |
<$10,000 | ______________ | YES | NO | ||||||||
Permitted Investments for joint ventures |
<$250,000 | ______________ | YES | NO | ||||||||
Permitted Liens for equipment leases |
<$100,000 | ______________ | YES | NO |
Please Enter Below Comments Regarding Violations:
The Officer further acknowledges that at any time Borrower is not in compliance with all the terms set forth in the Agreement, including, without limitation, the financial covenants, no credit extensions will be made.
Very truly yours, |
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Authorized Signer |
Name: |
Title: |
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
ANNEX I
[ * ]
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
Corporation Resolutions and Incumbency Certification
Authority to Procure Loans
I certify that I am the duly elected and qualified Secretary of CERUS CORPORATION (the Company); that the following is a true and correct copy of resolutions duly adopted by the Board of Directors of the Company in accordance with its bylaws and applicable statutes.
Copy of Resolutions:
Be it Resolved, That:
1. | Any one (1) of the following President and Chief Executive Officer, Chief Financial Officer (if and when appointed), Chief Accounting Officer and Chief Legal Officer of the Company are/is authorized, for, on behalf of, and in the name of the Company to: |
(a) | Negotiate and procure loans, letters of credit and other credit or financial accommodations from Comerica Bank (Bank), a Texas banking association, from time to time, in an aggregate principal amount not to exceed Twelve Million Dollars ($12,000,000) at any time outstanding. |
(b) | Discount with the Bank, commercial or other business paper belonging to the Company made or drawn by or upon third parties, in a principal amount not exceeding Twelve Million Dollars ($12,000,000) at anytime outstanding; |
(c) | Purchase, sell, exchange, assign, endorse for transfer and/or deliver certificates and/or instruments representing stocks, bonds, evidences of Indebtedness or other securities owned by the Company, whether or not registered in the name of the Company; |
(d) | Give security for any liabilities of the Company to the Bank by grant, security interest, assignment, lien, deed of trust or mortgage upon any real or personal property, tangible or intangible of the Company; and |
(e) | Execute and deliver in form and content as may be required by the Bank any and all notes, evidences of Indebtedness, applications for letters of credit, guaranties, subordination agreements, loan and security agreements, financing statements, assignments, liens, deeds of trust, mortgages, trust receipts and other agreements, instruments or documents to carry out the purposes of these Resolutions, ,and any and all amendments or modifications thereto, any or all of which may relate to all or to substantially all of the Companys property and assets. |
2. | Said Bank be and it is authorized and directed to pay the proceeds of any such loans or discounts as directed by the persons so authorized to sign, whether so payable to the order of any of said persons in their individual capacities or not, and whether such proceeds are deposited to the individual credit of any of said persons or not; |
3. | Any and all agreements, instruments and documents previously executed and acts and things previously done to carry out the purposes of these Resolutions are ratified, confirmed and approved as the act or acts of the Company. |
4. | These Resolutions shall continue in force, and the Bank may consider the holders of said offices and their signatures to be and continue to be as set forth in a certified copy of these Resolutions delivered to the Bank, until notice to the contrary in writing is duly served on the Bank (such notice to have no effect on any action previously taken by the Bank in reliance on these Resolutions). |
5. | Any person, Company or other legal entity dealing with the Bank may rely upon a certificate signed by an officer of the Bank to effect that these Resolutions and any agreement, instrument or document executed pursuant to them are still in full force and effect and binding upon the Company. |
6. | The Bank may consider the holders of the offices of the Company and their signatures, respectively, to be and continue to be as set forth in the Certificate of the Secretary of the Company until notice to the contrary in writing is duly served on the Bank. |
I further certify that the above Resolutions are in full force and effect as of the date of this Certificate; that these Resolutions and any borrowings or financial accommodations under these Resolutions have been properly noted in the corporate books and records, and have not been rescinded, annulled, revoked or modified; that neither the foregoing Resolutions nor any actions to be taken pursuant to them are or will be in contravention of any provision of the articles of incorporation or bylaws of the Company or of any material agreement, indenture or other instrument to which the Company is a party or by which it is bound; and that neither the articles of incorporation nor bylaws of the Company nor any agreement, indenture or other instrument to which the Company is a party or by which it is bound require the vote or consent of shareholders of the Company to authorize any act, matter or thing described in the foregoing Resolutions.
I further certify that the following named persons have been duly elected to the offices set opposite their respective names, that they continue to hold these offices at the present time, and that the signatures which appear below are the genuine, original signatures of each respectively:
1
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(PLEASE SUPPLY GENUINE SIGNATURES OF AUTHORIZED SIGNERS BELOW)
NAME (Type or Print) | TITLE | SIGNATURE | ||
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In Witness Whereof, I have affixed my name as Secretary and have caused the corporate seal (where available) of said Company to be affixed on .
Secretary |
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The Above Statements are Correct. | ___________________________________________________________ | |
SIGNATURE OF OFFICER OR DIRECTOR OR, IF NONE. A SHAREHOLDER OTHER THAN SECRETARY WHEN SECRETARY IS AUTHORIZED TO SIGN ALONE. |
Failure to complete the above when the Secretary is authorized to sign alone shall constitute a certification by the Secretary that the Secretary is the sole Shareholder, Director and Officer of the Company.
2
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
COMERICA BANK
Member FDIC
ITEMIZATION OF AMOUNT FINANCED
DISBURSEMENT INSTRUCTIONS
(Revolver)
Name(s): CERUS CORPORATION | Date: September 30, 2011 |
$ | credited to deposit account No. when Advances are requested or disbursed to Borrower by cashiers check or wire transfer | |
Amounts paid to others on your behalf:
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$ | to Comerica Bank for Loan Fee | |
$ | to Comerica Bank for Document Fee | |
$ | to Comerica Bank for accounts receivable audit (estimate) | |
$ | to Bank counsel fees and expenses | |
$ | to _________________ | |
$ | to _________________ | |
$ | TOTAL (AMOUNT FINANCED) |
Upon consummation of this transaction, this document will also serve as the authorization for Comerica Bank to disburse the loan proceeds as stated above.
Signature | Signature |
1
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
COMERICA BANK
Member FDIC
ITEMIZATION OF AMOUNT FINANCED
DISBURSEMENT INSTRUCTIONS
(Growth Capital)
Name(s): CERUS CORPORATION | Date: September 30, 2011 |
$ | credited to deposit account No. when Growth Capital Advances are requested or disbursed to Borrower by cashiers check or wire transfer | |
Amounts paid to others on your behalf:
| ||
$ | to Comerica Bank for Loan Fee | |
$ | to Comerica Bank for Document Fee | |
$ | to Comerica Bank for accounts receivable audit (estimate) | |
$ | to Bank counsel fees and expenses | |
$ | to _________________ | |
$ | to _________________ | |
$ | TOTAL (AMOUNT FINANCED) |
Upon consummation of this transaction, this document will also serve as the authorization for Comerica Bank to disburse the loan proceeds as stated above.
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Signature | Signature |
2
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
Agreement to Furnish Insurance to Loan and Security Agreement
(Herein called Bank)
Borrower(s): CERUS CORPORATION
I understand that the Security Agreement or Deed of Trust which I executed in connection with this transaction requires me to provide a physical damage insurance policy including a Lenders Loss Payable Endorsement in favor of the Bank as shown below, within ten (10) days from the date of this agreement.
The following minimum insurance must be provided according to the terms of the security documents.
¨ | AUTOMOBILES, TRUCKS, RECREATIONAL VEHICLES | x MACHINERY & EQUIPMENT: MISCELLANEOUS PERSONAL PROPERTY | ||||||
Comprehensive & Collision | Fire & Extended Coverage | |||||||
Lenders Loss Payable Endorsement | Lenders Loss Payable Endorsement | |||||||
¨ Breach of Warranty Endorsement | ||||||||
¨ | BOATS | ¨ AIRCRAFT | ||||||
All Risk Hull Insurance | All Risk Ground & Flight Insurance | |||||||
Lenders Loss Payable Endorsement | Lenders Loss Payable Endorsement | |||||||
¨ Breach of Warranty Endorsement | ¨ Breach of Warranty Endorsement | |||||||
¨ | MOBILE HOMES | ¨ REAL PROPERTY | ||||||
Fire, Theft & Combined Additional Coverage | Fire & Extended Coverage | |||||||
Lenders Loss Payable Endorsement | Lenders Loss Payable Endorsement | |||||||
¨ Earthquake | ¨ All Risk Coverage | |||||||
¨ Special Form Risk Coverage | ||||||||
¨ | ||||||||
¨ Earthquake | ||||||||
x | INVENTORY | ¨ Other _______________________________________ | ||||||
¨ | Other ______________________________________________________________________________________________________________________ | |||||||
______________________________________________________________________________________________________________________________ | ||||||||
______________________________________________________________________________________________________________________________ |
I may obtain the required insurance from any company that is acceptable to the Bank, and will deliver proof of such coverage with an effective date of September 30, 2011 or earlier.
I understand and agree that if I fail to deliver proof of insurance to the Bank at the address below, or upon the lapse or cancellation of such insurance, the Bank may procure Lenders Single Interest Insurance or other similar coverage on the property. If the Bank procures insurance to protect its interest in the property described in the security documents, the cost for the insurance will be added to my indebtedness as provided in the security documents. Lenders Single Interest Insurance shall cover only the Banks interest as a secured party, and shall become effective at the earlier of the funding date of this transaction or the date my insurance was canceled or expired. I UNDERSTAND THAT LENDERS SINGLE INTEREST INSURANCE WILL PROVIDE ME WITH ONLY LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN, HOWEVER, MY EQUITY IN THE PROPERTY WILL NOT BE INSURED. FURTHER, THE INSURANCE WILL NOT PROVIDE MINIMUM PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND DOES NOT MEET THE REQUIREMENTS OF THE FINANCIAL RESPONSIBILITY LAW.
CALIFORNIA CIVIL CODE SECTION 2955.5. HAZARD INSURANCE DISCLOSURE: No lender shall require a borrower, as a condition of receiving or maintaining a loan secured by real property, to provide hazard insurance coverage against risks to the improvements on that real property in an amount exceeding the replacement value of the improvements on the property.
Bank Address for Insurance Documents: | ||||
Comerica Bank Collateral Operations, Mail Code 6514 | ||||
1508 W. Mockingbird Lane | ||||
Dallas, Texas 75235 | ||||
1
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
I acknowledge having read the provisions of this agreement, and agree to its terms. I authorize the Bank to provide to any person (including any insurance agent or company) any information necessary to obtain the insurance coverage required.
OWNER(S) OF COLLATERAL: | DATED: September 30, 2011 | |
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INSURANCE VERIFICATION | ||
Date ________________________________________ | Phone ____________________ | |
Agents Name _________________________________ | Person Talked To ___________ | |
Agents Address ________________________________________________________________________________________ | ||
Insurance Company _____________________________________________________________________________________ | ||
Policy Number(s) _______________________________________________________________________________________ | ||
Effective Dates: From ___________________________ | To: ___________________________________________ | |
Deductible $ _________________________________ | Comments: _____________________________________ | |
2
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
COMERICA BANK | ||||
AUTOMATIC DEBIT AUTHORIZATION | ||||
Member FDIC |
To: Comerica Bank | ||||
Re: Loan # _________________________________________________________
You are hereby authorized and instructed to charge account No. in the name of CERUS CORPORATION | ||||
for principal, interest and other payments due on above referenced loan as set forth below and credit the loan referenced above . | ||||
x Debit each interest payment as it becomes due according to the terms of the Loan and Security Agreement and any renewals or amendments thereof. | ||||
x Debit each principal payment as it becomes due according to the terms of the Loan and Security Agreement and any renewals or amendments thereof. | ||||
x Debit each payment for Bank Expenses as it becomes due according to the terms of the Loan and Security Agreement and any renewals or amendments thereof. | ||||
This Authorization is to remain in full force and effect until revoked in writing. | ||||
Borrower Signature
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Date
| |||
September 30, 2011
| ||||
September 30, 2011
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[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
USA PATRIOT ACT
NOTICE
OF
CUSTOMER IDENTIFICATION
IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT
To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
WHAT THIS MEANS FOR YOU: when you open an account, we will ask your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your drivers license or other identifying documents.
2
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
DEBTOR CERUS CORPORATION
SECURED PARTY: COMERICA BANK
EXHIBIT A to UCC Financing Statement
COLLATERAL DESCRIPTION ATTACHMENT TO UCC NATIONAL FINANCING FORM
All personal property of Borrower (herein referred to as Borrower or Debtor) whether presently existing or hereafter created or acquired, and wherever located, including, but not limited to:
All personal property of Debtor of every kind, whether presently existing or hereafter created or acquired, and wherever located, including but not limited to: (a) all accounts (including health-care-insurance receivables), chattel paper (including tangible and electronic chattel paper), deposit accounts, documents (including negotiable documents), equipment (including all accessions and additions thereto), general intangibles (including payment intangibles and software; excluding Intellectual Property), goods (including fixtures), instruments (including promissory notes), inventory (including all goods held for sale or lease or to be furnished under a contract of service, and including returns and repossessions), investment property (including securities and securities entitlements), letter of credit rights, money, and all of Debtors books and records with respect to any of the foregoing, and the computers and equipment containing said books and records; and (b) any and all cash proceeds and/or noncash proceeds thereof, including, without limitation, insurance proceeds, and all supporting obligations and the security therefor or for any right to payment. All terms above have the meanings given to them in the California Uniform Commercial Code, as amended or supplemented from time to time.
Notwithstanding the foregoing, the Collateral shall not include (i) any copyrights, patents, trademarks, servicemarks and applications therefor, now owned or hereafter acquired, or any claims for damages by way of any past, present and future infringement of any of the foregoing (collectively, the Intellectual Property); provided, however, that the Collateral shall include all accounts and general intangibles that consist of rights to payment from the sale, licensing or disposition of all or any part of, or rights in, the Intellectual Property (the Rights to Payment); (ii) more than 65% of the presently existing and hereafter arising, issued and outstanding shares of capital stock owned by Borrower or any Subsidiary organized outside the United States which Shares entitle the holder thereof to vote for directors or any other matter, and (iii) the Fenwal license agreement. Notwithstanding the foregoing, if a judicial authority (including a U.S. Bankruptcy Court) holds that a security interest in the underlying Intellectual Property is necessary to have a security interest in the Rights to Payment, then the Collateral shall automatically, and effective as of September 30, 2011, include the Intellectual Property to the extent necessary to permit perfection of Banks security interest in the Rights to Payment.
[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
Exhibit 31.1
CERTIFICATION
I, William M. Greenman, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Cerus Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent function): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 3, 2011 | /s/ William M. Greenman | |||
William M. Greenman | ||||
President and Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, Kevin D. Green, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Cerus Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent function): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 3, 2011 | /s/ Kevin D. Green | |||
Kevin D. Green | ||||
Vice President, Finance and Chief Accounting Officer (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the Exchange Act) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), William M. Greenman, the Chief Executive Officer of Cerus Corporation (the Company) and Kevin D. Green, the Chief Accounting Officer of the Company, hereby certify that, to the best of their knowledge:
1. The Companys Quarterly Report on Form 10-Q for the period ended September 30, 2011, and to which this Certification is attached as Exhibit 32.1 (the Periodic Report), fully complies with the requirements of section 13(a) or section 15(d) of the Exchange Act, and
2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the 3rd day of November, 2011.
/s/ William M. Greenman |
William M. Greenman President and Chief Executive Officer |
/s/ Kevin D. Green |
Kevin D. Green Vice
President, Finance and Chief Accounting Officer |
*;1M;9)MY'"JH8%U5Y`S,A<^.8H%`0$.8^6:VZ8@P`*O)EOG45;NRE.4440S"8Q1,7$!H-M;K<8-9UK
Condensed Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands | Sep. 30, 2011 | Dec. 31, 2010 |
---|---|---|
Condensed Consolidated Balance Sheets | ||
Accounts receivable, allowance | $ 48 | $ 51 |
Document And Entity Information | 9 Months Ended | |
---|---|---|
Sep. 30, 2011 | Oct. 26, 2011 | |
Document And Entity Information | ||
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Sep. 30, 2011 | |
Entity Central Index Key | 0001020214 | |
Document Fiscal Year Focus | 2011 | |
Document Fiscal Period Focus | Q3 | |
Entity Registrant Name | CERUS CORP | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Accelerated Filer | |
Entity Common Stock, Shares Outstanding | 48.1 |
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Accrued Liabilities | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Accrued Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accrued Liabilities | Note 7. Accrued Liabilities Accrued liabilities consisted of the following (in thousands):
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Comprehensive Income (Loss) | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive Income (Loss) | Note 12. Comprehensive Income (Loss) Comprehensive income (loss) and its components for the three and nine months ended September 30, 2011, and 2010 were as follows (in thousands):
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Fair Value On Financial Instruments | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Fair Value On Financial Instruments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value On Financial Instruments | Note 3. Fair Value on Financial Instruments The fair values of certain of the Company's financial assets and liabilities were determined using the following inputs at September 30, 2011 (in thousands):
The fair values of certain of the Company's financial assets were determined using the following inputs at December 31, 2010 (in thousands):
A reconciliation of the beginning and ending balances for warrant liabilities using significant unobservable inputs (Level 3) from December 31, 2010 to September 30, 2011 was as follows (in thousands):
The Company did not have any transfers amongst fair value measurement levels during the nine months ended September 30, 2011. |
Long-Term Note Payable | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Long-Term Note Payable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-Term Note Payable | Note 9. Long-term Note Payable Long-term note payable at September 30, 2011 consisted of the following (in thousands):
Long-term note payable at December 31, 2010 consisted of the following (in thousands):
Principal and interest payments on the long-term note payable at September 30, 2011 are expected to be as follows for each of the following five years (in thousands):
Loan and Security Agreement In September 2011, the Company entered into a loan and security agreement (the "Credit Agreement") with Comerica Bank ("Comerica"). The Credit Agreement provides for a growth capital loan of up to $8.0 million ("Growth Capital Loan") and a formula based revolving line of credit ("RLOC") of up to $4.0 million plus any unused amounts from the Growth Capital Loan. Under the Credit Agreement, the Company is limited to an aggregate borrowing of up to $10.0 million at any time. 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 Credit Agreement. Growth Capital Loan Concurrent with the execution of the Credit Agreement, in September 2011, the Company borrowed $5.0 million of the Growth Capital Loan ("Growth Capital Loan A"), substantially all of which was used to repay the Company's prior debt with Oxford Finance Corporation ("Oxford"), as discussed in further detail below, with the remainder used for general corporate purposes. Growth Capital Loan A, which matures in 48 months, bears 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. The Company may draw up to an additional $3.0 million of the Growth Capital Loan ("Growth Capital Loan B") between December 31, 2011 and June 30, 2012. Growth Capital Loan B will bear a fixed interest rate based on the higher of (i) 6.25% or (ii) 6.00% plus the three month LIBOR rate at the date of draw, with interest–only payments due for the first six months followed by equal principal and interest payments for the remaining 36 months. 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 A and are being amortized as a component of interest expense using the effective interest method over the term of the Growth Capital Loan A (discount was based on an implied interest rate of 7.07%). The Company will also be required to make a final payment fee of 1% of the amounts drawn under Growth Capital Loan A and Growth Capital Loan B due on the earlier of (i) prepayment of the Growth Capital Loan or (ii) the maturity of the Growth Capital Loan. The final payment fee will be accreted to interest expense using the effective interest method over the life of the Growth Capital Loan A and B upon draw. Revolving Line of Credit The Credit Agreement also provides for a RLOC of up to $4.0 million plus any unused amounts from Growth Capital Loan B ("RLOC Loan Amount"). The amount available under the RLOC, which is available to the Company until September 30, 2013, is limited to the lesser of (i) 80% of eligible trade receivables or (ii) the RLOC Loan Amount. The RLOC will bear a floating rate based on the lender's prime rate plus 1.50%, with interest–only payments due each month. The Company will be required to repay the principal drawn from the RLOC at the end of the RLOC term. In September 2011, the Company incurred a commitment fee of $20,000, and will pay the same commitment fee at each annual anniversary of the RLOC. As of September 30, 2011, the Company had not drawn down any amounts under the RLOC. Compliance with Covenants The Company is required to maintain compliance with certain customary and routine financial covenants under the Credit Agreement. Throughout the term of the Credit Agreement, the Company is also obligated to meet certain conditions which include maintaining a minimum cash balance of $2.5 million and achieving minimum revenue levels, which will be measured monthly based on a six-month trailing basis and must be at least 75% of the pre-established future projected revenues for the six-month period. Non-compliance with the covenants could result in the principal of the note becoming due and payable. As of September 30, 2011, the Company was in compliance with the financial covenants as set forth in the Credit Agreement. Growth Capital Facility Agreement In March 2010, the Company entered into a growth capital facility agreement with Oxford and immediately borrowed and issued a senior secured long-term note payable for $5.0 million. The note carried a fixed interest rate of 12.04%, with interest–only payments due for the first nine months and then equal principal and interest payments for an additional 30 months. In connection with the issuance of the note, the Company paid an upfront facility fee of $0.1 million and incurred closing costs of $0.1 million, which was recorded as a discount to the note payable and was amortized as a component of interest expense using the effective interest method over the term of the note (discount was based on an implied interest rate of 13.84%). In addition, the Company agreed to pay a $0.4 million closing fee upon maturity of the note, which was being accreted to interest expense using the effective interest method over the life of the note. In September 2011, the Company repaid the outstanding balance of the long-term note payable owed to Oxford using the proceeds received from the Credit Agreement as discussed in further detail above. The Company also accelerated and expensed the remaining closing cost and fees of $0.2 million to interest expense during the three and nine months ended September 30, 2011. |
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Segment, Customer And Geographic Information | Note 14. Segment, Customer and Geographic Information At September 30, 2011 and 2010, the Company operated 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 are minimal. During the three and nine months ended September 30, 2011 and 2010, the Company had the following significant customers, all of which operate in a country outside of the United States, listed as a percentage of product revenue:
During the three months ended September 30, 2011 and 2010, the Company also recognized government grants and cooperative agreements revenue which represented 16% of total revenue and 9% of total revenue, respectively. During the nine months ended September 30, 2011 and 2010, the Company recognized government grants and cooperative agreements revenue which represented 8% of total revenue and 6% of total revenue, respectively. |
Stockholders' Equity | 9 Months Ended |
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Stockholders' Equity | Note 10. Stockholders' Equity Series B Preferred Stock Fenwal holds 3,327 shares of the Company's Series B preferred stock. The holder of Series B preferred stock has 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 market 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 may convert each share of Series B preferred stock into 100 shares of the Company's common stock. If all shares of Series B preferred stock were converted to common stock, 332,700 shares of common stock would be issued, which represents approximately 1% of the outstanding common stock of the Company at September 30, 2011. The Company has the right to redeem the Series B preferred stock prior to conversion for a payment of $9.5 million. 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 ("2009 Warrants"), 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%. At September 30, 2011, the fair value of the 2009 Warrants was determined to be approximately $1.7 million using the binomial-lattice option valuation model and applying the following assumptions: (i) a risk-free rate of 0.42%, (ii) an expected term of 2.90 years, (iii) no dividend yield and (iv) a volatility of 65%.
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%. At September 30, 2011, the fair value of the 2010 Warrants was determined to be approximately $2.9 million using the binomial-lattice option valuation model and applying the following assumptions: (i) a risk-free rate of 0.69%, (ii) an expected term of 4.12 years, (iii) no dividend yield and (iv) a volatility of 63%. The fair value of the 2009 Warrants and 2010 Warrants was recorded on the consolidated condensed 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 expiration, 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. These offerings were made pursuant to the Company's shelf registration statement on Form S-3. For the three months ended September 30, 2011 and 2010, due to the changes in fair value of the warrants, the Company recorded gains of $5.4 million and losses of $0.7 million, respectively, on its condensed consolidated statement of operations within non-operating income (expense), net. For the nine months ended September 30, 2011 and 2010, due to the changes in fair value of the warrants, the Company recorded gains of $3.8 million and losses of $2.3 million, respectively, on its condensed consolidated statement of operations within non-operating income (expense), net. At September 30, 2011, no warrants had been exercised. At-the-Market Agreement In June 2011, the Company entered into an At-The-Market Issuance Sales Agreement (the "Sales Agreement") with McNicoll, Lewis & Vlak LLC ("MLV"), which allows the Company to issue and sell shares of its common stock having an aggregate offering price of up to $20.0 million through MLV. In conjunction with the Sales Agreement, MLV will act as the Company's sales agent and will receive compensation based on an aggregate of 3% of the gross proceeds on the sale price per share of its common stock. Any sales made pursuant to the Sale Agreement are deemed an "at-the-market" offering and would be made pursuant to the effectiveness of the Company's shelf registration statements on Form S-3, initially filed with the SEC in October 2008 and August 2009. The Company did not place any common stock under the Sales Agreement during the three and nine months ended September 30, 2011. 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. |
Commitments And Contingencies | 9 Months Ended |
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Sep. 30, 2011 | |
Commitments And Contingencies | |
Commitments And Contingencies | Note 8. Commitments and Contingencies Operating Leases The Company generally leases its office facilities 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. These facility leases generally contain renewal options and provisions adjusting the lease payments if those renewal options are exercised. The Company's facility leases qualify as operating leases under ASC Topic 840, "Leases" and as such, are not included on its condensed consolidated balance sheets. Royalties The Company is obligated to pay royalties on certain INTERCEPT Blood System product sales based on a percentage of net sales generated. The royalty rates vary by product, with a rate of 10% of net sales for the platelet system, 3% of net sales for the plasma system, 5% of net sales for the red blood cells, or the red blood cell system, and 6.5% of net sales for UVA illuminators.
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 Fenwal at no cost for use in manufacturing finished disposable kits. Certain of these agreements require minimum purchase commitments from the Company. |
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Summary Of Significant Accounting Policies | Note 1. Summary of Significant Accounting Policies Principles of Consolidation 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 normal recurring entries, considered necessary for a fair presentation have been made for the three and nine months ended September 30, 2011. As previously reported in the Company's 2010 Annual Report on Form 10-K in "Note 18. Quarterly Financial Information" in the Notes to Consolidated Financial Statements, adjustments relating to the acquisition of certain assets from BioOne Corporation ("BioOne") were made to previously reported financial statements for the three and nine months ended September 30, 2010. These adjustments increased long-term assets and reduced operating expenses by $0.2 million for the three months ended September 30, 2010, and reduced long-term assets and increased operating expenses by $0.2 million for the nine months ended September 30, 2010. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011, or for any future periods. These condensed consolidated financial statements and notes should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended December 31, 2010, which were included in the Company's 2010 Annual Report on Form 10-K, filed with the SEC on March 16, 2011. The accompanying balance sheet as of December 31, 2010 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 the 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 probable. The Company's main sources of revenues through September 30, 2011 were product revenue from sales of the INTERCEPT Blood System for platelets and plasma ("platelets 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 INTERCEPT Blood System products, the Company uses a binding purchase order and signed sales contract as evidence of written agreement. The Company sells its platelets 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 evaluates whether the delivered elements have stand-alone value to the customer. Effective January 1, 2011, the Company adopted the revised guidance in Accounting Standard Update ("ASU") No. 2009-13, which was issued by the Financial Accounting Standards Board ("FASB,") in October 2009 related to revenue recognition in accordance with the Accounting Standards Codification ("ASC") Topic 605-25, "Revenue Recognition—Arrangements with Multiple Deliverables," on a prospective basis for applicable transactions originating or materially modified after December 31, 2010. Under the revised guidance, companies must assess whether or not revenue arrangements with multiple deliverables exist under the revised guidance, how the deliverables should be separated and how the consideration should be allocated to the elements. Prior to adoption of ASU No. 2009-13, consideration received was allocated to elements that were identified as discrete units of accounting based on the relative fair value method. Beginning January 1, 2011, upon the adoption of ASU No. 2009-13, 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 discernable due to the Company's limited history of selling its products and variability in its pricing. Since the Company's products are novel and unique and are not sold by others, third-party evidence of selling price is unavailable. The adoption of the revised guidance did not have a material impact on the Company's condensed consolidated results of operations for the three and nine months ended September 30, 2011 nor is it currently anticipated to have a material impact on future periods. At September 30, 2011 and December 31, 2010, the Company had $0.1 million and $0.2 million, respectively, 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 is recognized as the costs on the projects are incurred. The Company receives certain United States government grants and contracts that support research in defined research projects. These grants generally provide for reimbursement of approved costs incurred as defined in the various grants. Research and Development Expenses The Company receives certain United States government grants that support the Company's efforts in defined research projects. These grants generally provide for reimbursement of approved costs incurred as defined in the various grants. Revenue associated with these grants is recognized as costs under each grant are incurred. In addition, accordance with ASC Topic 730, "Accounting for Research and Development Expenses," research and development expenses are charged to expense when incurred. 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 (described previously in this Note under the heading "Use of Estimates") 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, Cash Equivalents and Short-Term Investments 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. Investments with original maturities of greater than three months but less than one year from the date of purchase are classified as short-term investments. These investments primarily consist of marketable debt securities, which include money market instruments and United States government agency securities, and are classified as available-for-sale. 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 based on quoted market prices. 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. Realized gains and losses from the sale or maturity of available-for-sale investments are recorded in "Other expense, 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 expense, net" on the Company's condensed consolidated statements of operations. As of September 30, 2011, the Company also maintained a certificate of deposit for approximately $0.2 million with a domestic bank. The Company holds this certificate of deposit 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 as restricted cash on its condensed consolidated balance sheets at September 30, 2011 and December 31, 2010. 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.
Substantially all of the Company's cash, cash equivalents and short-term investments are maintained pursuant to the Company's investment policy at a major financial institution 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 type of investments that exist within its investment portfolio. Generally, all of the Company's remaining investments carry high credit quality ratings, which is in accordance with its investment policy. At September 30, 2011, the Company does not believe there is significant financial risk from non-performance by the issuers of the Company's cash equivalents and short-term investments. 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 9 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 balance sheet and records a charge on its condensed consolidated statement of operations. The Company had recorded allowances for potentially uncollectible accounts receivable of approximately $0.1 million at both September 30, 2011 and December 31, 2010. Actual collection losses may differ from management's estimate, and such differences could have a material impact to the Company's financial position and results of operations. The Company had three customers each accounting for more than 10% of the Company's outstanding trade receivables, which accounted for approximately 66% of outstanding trade receivables, at September 30, 2011. The Company had four customers each accounting for more than 10% of the Company's outstanding trade receivables, which accounted for approximately 63% of outstanding trade receivables at December 31, 2010. To date, the Company has not experienced collection difficulties from these customers. Inventories 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 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 Fenwal, Inc. ("Fenwal") 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. In addition, 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, 2011 and December 31, 2010, the Company classified its work-in-process inventory as a current asset on its condensed consolidated balance sheet 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 frequently reviews the composition of inventory to identify obsolete, slow-moving or otherwise unsalable items. To the extent unsalable items are observed and there is no alternative use, the Company writes-down its inventory to net realizable value in the period that it is first recognized. The 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. At September 30, 2011 and December 31, 2010, the Company had $0.2 million and $0.4 million, respectively, reserved for potential obsolete or expiring product. 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 Goodwill and intangible assets, net is 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 the INTERCEPT Asia license, are subject to periodic 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 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 they 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 by NASDAQ. 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 6 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, 2011 and 2010. 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 less than $(0.1) million and $0.8 million during the three months ended September 30, 2011 and 2010, respectively, and $0.4 million and $(0.2) million during the nine months ended September 30, 2011 and 2010, 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 1) the date at which a commitment for performance by the grantee to earn the equity instrument is reached or 2) 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. Gains and losses from warrant revaluation are recorded in "Gain (Loss) from revaluation of warrant liability" on the condensed consolidated statements of operations. During the three and nine months ended September 30, 2011, the Company recorded non-cash gains of $5.4 million and $3.8 million, respectively, associated with changes in the fair value of the warrants from December 31, 2010. During the three and nine months ended September 30, 2010, the Company recorded non-cash charges of $0.7 million and $2.3 million, respectively, associated with changes in the fair value of the warrants from December 31, 2009. 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. Other Comprehensive Income The components of comprehensive income (loss) include net income (loss) and other comprehensive income. The Company's only component of other comprehensive income for the three and nine months ended September 30, 2011 and 2010 consisted of unrealized gains from the Company's available-for-sales short-term investments. Other comprehensive income is reported as a separate component of stockholders' equity. 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, 2011 or December 31, 2010. 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 2006 through 2010 remain subject to examination by the taxing jurisdictions. Net Income (Loss) Per Share Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted income per share would assume conversion of all potentially dilutive securities, such as stock options, convertible preferred stock, ESPP, warrants and restricted stock units. If the Company recorded a net loss, diluted loss per share uses the same weighted average number of common shares outstanding for the period as calculated for the basic loss per share as the inclusion of any commons stock equivalents would be anti-dilutive.
The following table sets forth the reconciliation of the numerator and denominator used in the computation of basic and diluted net income (loss) per common share for the three and nine months ended September 30, 2011 and 2010 (in thousands, except per share amounts):
The table below presents stock options, convertible preferred stock, ESPP, warrants and restricted stock units that are excluded from the diluted net income (loss) per common share due to their anti-dilutive effect for the three and nine months ended September 30, 2011 and 2010 (shares in thousands):
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. There have been very few warranty costs incurred through September 30, 2011, and the company is unaware of any future warranty claims. Accordingly, at September 30, 2011 and December 31, 2010, the Company did not accrue for any potential future warranty costs. 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. Based on the borrowing rates currently available to the Company for loans with similar terms, the Company believes the fair value of long-term 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 instruments within Level 1 if quote prices are available in active markets, which include its money market funds as the maturity of money market funds are relatively short and the carrying amount is a reasonable estimate of fair value. 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 and corporate debt securities. 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.
See Note 3 in the Notes to condensed consolidated financial statements for further information regarding the Company's valuation on financial instruments. New Accounting Pronouncements In May 2011, the FASB issued updated fair value measurement guidance under ASU No. 2011-14 "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs," surrounding changes in the valuation premise of highest and best use of an asset, the application of premiums and discounts, and enhanced disclosure requirements. Under ASU No. 2011-14, the measurement of fair value of financial instruments will primarily be measured at the level of the unit of account whereas it was historically able to utilize the valuation premise of highest and best use of an asset, which can be applied primarily to measuring the fair value of nonfinancial assets only going forward. In addition, the application of blockage factors and other premiums and discounts in a fair value measurement will be prohibited in the valuation of all fair value levels of the hierarchy. The new disclosure requirements include, but are not limited to, further qualitative and quantitative discussions regarding level 3 fair value measurements, specifically significant unobservable inputs used, description of the valuation processes and sensitivity analysis, the disclosure of any transfers and the reasons thereof between levels 1 and 2, and the determination of assets and liabilities that are not recorded at fair value to be categorized under the fair value hierarchy. The updated fair value measurement guidance is effective for interim and annual periods beginning after December 15, 2011, which will begin for the Company on January 1, 2012. The Company does not anticipate that the additional disclosure requirements will have a material impact on the condensed consolidated financial statements. In June 2011, the FASB issued ASU No. 2011-05 "Presentation of Comprehensive Income," which eliminates the presentation of other comprehensive income from the consolidated statements of stockholders' equity. Instead, companies would have the option to display net income and other comprehensive income in two separate, but consecutive statements or combine net income and other comprehensive income in one continuous statement, which would be referred to the consolidated statements of comprehensive income. The new presentation requirements under this guidance are effective for interim and annual periods beginning after December 15, 2011, which will begin for the Company on January 1, 2012, and retrospective application is required for all periods presented. The Company does not anticipate that the additional disclosure requirements will have a material impact on the condensed consolidated financial statements. In September 2011, the FASB issued ASU No. 2011-08 "Testing Goodwill for Impairment," which allows a company to test goodwill for impairment by first assessing the qualitative factors, which has also been updated under this guidance, to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount. If a company determines that it is more likely than not that the fair value of a reporting unit is less than the carrying amount, a 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. Under ASU No. 2011-08, the qualitative assessment is optional, such that a company has the choice to perform the goodwill impairment test under the original quantitative two-step approach only. The optional qualitative procedure for testing goodwill impairment under this guidance is effective for interim and annual periods beginning after December 15, 2011, which will begin for the Company on January 1, 2012; however, early adoption is permitted. The Company does not anticipate that the update to this accounting standard will have a material impact on the condensed consolidated financial statements. |
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Cash, Cash Equivalents And Short-Term Investments | Note 4. Cash, Cash Equivalents and Short-Term Investments The following is a summary of cash, cash equivalents and short-term investments at September 30, 2011 (in thousands):
The following is a summary of cash, cash equivalents and short-term investments at December 31, 2010 (in thousands):
Cash equivalents and short-term investments consisted of the following by original contractual maturity (in thousands):
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 minimal during the nine months ended September 30, 2011. The Company did not record any gains from the sale or maturity of available-for-sale investments during the three months ended September 30, 2011 and during the three and nine months ended September 30, 2010. The Company did not record losses on investments experiencing an other-than-temporary decline in fair value during the three and nine months ended September 30, 2011 and 2010, 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, 2011. However, the Company recorded minimal gross realized losses from the sale or maturity of available-for-sale investments during the three and nine months ended September 30, 2010. |
Inventories | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventories | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventories | Note 5. Inventories Inventories consisted of the following (in thousands):
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Development And License Agreements | 9 Months Ended |
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Sep. 30, 2011 | |
Development And License Agreements | |
Development And License Agreements | Note 13. Development and License Agreements Agreements with Fenwal, Related Party In December 2009, the Company and Baxter International Inc. ("Baxter") entered into a settlement agreement regarding disputed amounts for certain transition services provided in 2006 by Baxter in conjunction with the transfer of commercialization rights to the Company. In consideration for agreeing to the settlement, with both parties waiving all rights and obligations, the Company agreed to pay Baxter $0.5 million, which was recorded as a payable on its December 31, 2009 consolidated balance sheet, and subsequently paid by the Company in 2010. As a result of Baxter's sale of its transfusion therapies division in 2007 to Fenwal, the Company has certain agreements with Fenwal which require the Company to pay royalties on future INTERCEPT Blood System product sales at royalty rates that vary by product: 10% of product sales for the platelet system, 3% of product sales for the plasma system and 5% of product sales for the red blood cell system, and 6.5% on sales of illuminators. During the three months ended September 30, 2011 and 2010, the Company made royalty payments to Fenwal of $0.6 million and $0.4 million, respectively, and $1.6 million and $1.3 million during the nine months ended September 30, 2011 and 2010, respectively. At September 30, 2011 and December 31, 2010, the Company owed royalties to Fenwal of $0.6 million and $0.5 million, respectively. In December 2008, the Company extended its agreement with Fenwal to manufacture finished disposable kits for the platelet and plasma systems through December 31, 2013. Under the amended manufacturing agreement, the Company pays Fenwal 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 Fenwal of $2.1 million and $2.2 million relating to the manufacturing of the Company products during the three months ended September 30, 2011, and 2010, respectively, and $8.5 million and $6.7 million during the nine months ended September 30, 2011 and 2010, respectively. At both September 30, 2011 and December 31, 2010, the Company owed Fenwal $2.3 million for INTERCEPT disposable kits manufactured. Cooperative Agreements with the United States Armed Forces Since February 2001, the Company has received awards under cooperative agreements with the Army Medical Research Acquisition Activity division of the Department of Defense. The Company received these awards in order to develop its pathogen inactivation technologies for the improved safety and availability of blood that may be used by the United States Armed Forces for medical transfusions. Under the conditions of the agreements, the Company is conducting research on the inactivation of infectious pathogens in blood, including unusual viruses, bacteria and parasites that are of concern to the United States Armed Forces. This funding supports advanced development of the Company's red blood cell system. The Company recognized $1.5 million and $0.5 million of revenue under these agreements during the three months ended September 30, 2011, and 2010, respectively, and $1.9 million and $0.9 million for the nine months ended September 30, 2011 and 2010, respectively. |
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Goodwill And Intangible Assets, Net | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Goodwill And Intangible Assets, Net | Note 6. Goodwill and Intangible Assets, net Goodwill During the three and nine months ended September 30, 2011, the Company did not dispose of or recognize additional goodwill. On August 31, 2011, the Company performed its annual review of goodwill. As described in Note 1 above, the Company applied the enterprise approach by reviewing the quoted market capitalization of the Company as reported by NASDAQ to calculate the fair value. In addition, the Company considered its future forecasted results, the economic environment and overall market conditions. As a result of the Company's assessment that its fair value of the reporting unit exceeded its carrying amount, the Company determined that goodwill was not impaired during the three or nine months ended September 30, 2011. Therefore, the carrying amount of goodwill was $1.3 million, which resulted from the August 2010 acquisition of certain assets from BioOne, at both September 30, 2011 and December 31, 2010.
Intangible Assets, net The following is a summary of intangible assets, net at September 30, 2011 (in thousands):
The following is a summary of intangible assets, net at December 31, 2010 (in thousands):
The Company recognized $0.05 million and $0.2 million in amortization expense related to intangible assets for the three and nine months ended September 30, 2011, respectively. During the three and nine months ended September 30, 2011, there were no impairment charges recognized and the Company did not renew or extend the term of the acquired intangible assets. The expected annual amortization expense of the intangible assets, net at September 30, 2011 are $0.05 million for the remaining three months of 2011, $0.2 million each subsequent year thereafter through December 31, 2019 and $0.1 million in 2020. |
Acquisition | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||
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Acquisition | Note 2. Acquisition On August 24, 2010, the Company acquired certain assets of BioOne, a privately held Japanese company established to develop technologies to improve the safety of blood products in Asia. The assets included the commercialization licenses that the Company had granted to BioOne for both the platelet and plasma systems, illuminators held as saleable inventory and demonstration illuminators. No liabilities were assumed. As consideration for the acquired BioOne assets, the Company relinquished all shares of BioOne that had been held by the Company and issued 1,172,357 shares of the Company's common stock to BioOne, of which 937,886 shares were issued at the close of the acquisition on August 24, 2010 and the remaining 234,471 shares were issued six months from the close of the acquisition date (February 25, 2011). The fair value of the Company's common stock issued to BioOne on both dates was measured based on the closing price of the Company's common stock on August 24, 2010, the date of acquisition, and was recorded as part of the total consideration. The total value of the consideration provided was $3.7 million, of which approximately $3.4 million related to the fair value of the 1,172,357 shares of the Company's common stock issued to BioOne and approximately $0.3 million related to the fair value of the Company's non-controlling equity interest in BioOne relinquished as a result of the acquisition. The Company recognized a gain of $0.3 million, which represented the difference between the assumed fair value of the pre-acquisition non-controlling equity interest of BioOne and its carrying value. The Company carried its 13% investment in BioOne at zero as it had previously fully impaired its investment in BioOne. The assumed fair value of the pre-acquisition non-controlling equity interest was calculated by applying the Company's 13% ownership investment in BioOne to the estimated fair value of the acquired assets (excluding goodwill) of $2.4 million as noted in the table below.
The Company also incurred acquisition related costs of $0.5 million, which were recorded as a component in "Acquisition related costs and impairment of long-term investment in related parties, net" on the consolidated statements of operations during the year ended December 31, 2010. The BioOne acquisition was accounted for as an acquisition of a business in accordance with ASC 805, "Business Combinations." The Company allocated the acquired tangible and intangible assets based on their estimated fair values as of the acquisition date. The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill. The goodwill recognized is not expected to be deductible for income tax purposes. The factors that contributed to the recognition of goodwill included securing buyer-specific synergies to increase revenue and profits through the commercialization of the INTERCEPT Blood System worldwide. By acquiring these commercialization rights in certain Asian countries, the Company was able to complete the global commercialization rights for its platelets and plasma systems. The following table summarizes the final allocation of fair value of assets acquired at the acquisition date (in thousands):
The commercialization rights in Asia represent the reacquisition of contractual rights originally granted to BioOne to market the Company's products in certain countries in Asia. The contractual term of this original agreement was perpetual and the Company estimated the fair value of these acquired rights based on future expected cash flows to be generated over the expected life of the underlying technology. As a result, these intangible assets are subject to periodic amortization over the estimated useful life of ten years. The estimated fair value of inventory illuminators and demonstration illuminators was based on the expected sales price of the inventory, less reasonable profit margins. The Company's operating results included the impact of the BioOne acquisition beginning from the acquisition date. The pro forma disclosures for historical periods have not been presented as the impact of the BioOne acquisition was not significant to the results of operations of the Company since BioOne did not have any significant revenues or expenses due to their limited operating activities as a result of a deteriorating financial situation. |
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Stock-Based Compensation | Note 11. Stock-Based Compensation The Company maintains an equity incentive plan to provide long-term incentives for employees, contractors, and members of its Board of Directors. The 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 also maintains an active 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. The Company has granted restricted stock units to its Senior Management. Subject to each grantee's continued employment, shares underlying the grants vest in three annual installments and are issuable at the end of the three-year vesting term. 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, the Company's expected stock price volatility, actual and projected employee stock option exercise behaviors, including forfeitures, the risk-free interest rate and expected dividends.
Total stock-based compensation recognized on the Company's condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010, was as follows (in thousands):
The Company did not record any stock-based compensation associated with the stock options exercisable for 50,000 shares of Common Stock with performance based vesting during the three and nine months ended September 30, 2011 and 2010 as the performance criteria was not probable of being achieved. These performance-based stock options remain outstanding at September 30, 2011. Activity under the Company's equity incentive plans is set forth below (in thousands except per share amounts):
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