Blood Matters.
2019 Annual Report
Emerging Pathogens
The emergence of new pathogens continues to pose a
significant health risk. Rapid urbanization, climate change
and new seasonal patterns have contributed to expanded
vector populations and ranges. As a result, we are faced
with an ever-increasing number of diseases from pathogens
originating in environments where they were previously
harmless or controlled. They can spread rapidly within a
population prior to detection and testing development.
SARS-CoV-2
Structure: Enveloped, single-
stranded RNA virus
Coronaviridae
COVID-19 (the disease)
SARS (Severe Acute Respiratory Syndrome)
MERS (Middle East Respiratory Syndrome)
Family:
Causes:
Related:
SARS CoV-2 Transmission
SARS CoV-2 is suspected to have jumped
from animals to humans in late 2019.
Estimates for its reproducibility among
humans rate it at a 2.4 on the R0 scale*
meaning that each infected person could
spread to 2.4 others. This makes it more
infectious than MERS and Influenza, but
less than SARS, the mumps, smallpox
or measles.
COVID-19 Pandemic Timeline
December 2019
January 2020
SARS CoV-2 has an R0* of 2.4.
*Reproducibility reflected as the average number of people who will catch the disease
from a single infected person, in a new population.
February 2020
March 2020
April 2020
Cases of pneumonia
first detected in China
and reported to WHO.
WHO confirms human
to human transmission.
First case on US soil.
Italy begins lockdown
amid the largest
outbreak in Europe.
WHO declares the outbreak to
be a pandemic. CA, NY,YY Spain,
and France initiate lockdowns.
Global confirmed
cases exceed 1.5MM;
deaths >100,000.
Pathogen Reduced Convalescent Plasma
When a person contracts a virus their immune system creates antibodies to fight the infection. These antibodies are found in plasma, which
is the liquid part of blood. Plasma with these infection-fighting antibodies is called “convalescent plasma.” Through a blood donation process,
this antibody-rich plasma can be collected from a recovered person, then transfused to a sick patient who is still fighting the virus.
Anecdotal data on coronavirus convalescent plasma (CCP) are promising but the results are yet to be confirmed with a large scale
clinical study. Given the promising nature, some clinicians are choosing to include CCP as part of their patients’ treatment regimen.
Plasma can be treated with pathogen reduction to reduce the risk of transfusion transmitted infection to the patient by other threats such
as bacteria, viruses, parasites and donor white cells.
Convalescent
Patient
Collected
Plasma
INTERCEPT
Blood System
Pathogen Reduction
Pathogen-Reduced
Convalescent Plasma
Plasma obtained from survivors have
SARS-CoV-2 antibodies.
Certain antibodies may help fight COVID-19
infection in a recipient of the transfused
plasma.
INTERCEPT reduces harmful agents that
may be present in donated plasma by
creating crosslinks in the DNA.
Threats may include many bacteria, viruses,
and parasites.
INTERCEPT has been shown to be effective in pathogen reducing several members of the coronavirus family but specific testing on SARS-CoV-2 has not been completed.
Dear Shareholders,
As we compose this letter reflecting on the accomplishments of 2019, the global incidence of COVID-19 is sharply
increasing and healthcare systems globally are dealing with the impact. The scrutiny on healthcare supply
chains has ramped significantly as a result of this pandemic, and the security of the blood supply chain has been
of particular focus, given the challenges associated with the availability of blood donors during this crisis and the
short shelf-life and complicated logistics of blood component distribution. While managing these blood supply
concerns heroically, blood collectors across the world are also racing to implement COVID-19 convalescent
plasma collections, to provide an urgently needed therapeutic option for acutely ill patients. At the time of this
annual report publication, the anecdotal data from case series in multiple countries looks promising.
The global COVID-19 pandemic will continue to evolve over the next 12-24 months, but will leave a lasting impact
on how governments, healthcare systems and blood centers view preparedness for future pandemics and the
risks associated with the supply chains. We believe the INTERCEPT Blood System will continue to prove its
important role in safeguarding the availability of national blood supplies. INTERCEPT has also proved useful in
enabling the rapid implementation of convalescent plasma programs for this and future pandemics. As with any
crisis, this pandemic has reframed the opportunities ahead of us. And it has further solidified the importance of
the Cerus mission.
Looking Back on 2019
During 2019, we delivered on our corporate goal to advance the INTERCEPT Blood System as the global
standard of care to protect the blood supply. September marked a milestone for both Cerus and U.S. blood
policy, when the U.S. Food and Drug Administration (FDA) issued a final guidance document compelling blood
centers and hospitals to take specific action to reduce the risk of transfusion transmitted bacterial infections
in platelets, with pathogen reduction as one of the options. INTERCEPT is now available in over 30 countries,
and, since the founding of the Company, we have sold kits to produce nearly 7,250,000 transfusable platelet
and plasma units. Given our ever-increasing global role in helping blood centers and hospitals proactively
safeguard the blood supply against known and emerging pathogens, we launched a new corporate logo and
the Blood Matters™ re-branding campaign to better embody our position as the leader in pathogen reduction
technologies and a trusted partner to our blood center and hospital customers.
With regard to our R&D portfolio, we made solid progress with the further development of our first therapeutic
product, pathogen reduced cryoprecipitate, which has received FDA breakthrough device designation. To
complete our INTERCEPT product portfolio, our red cell development program continues to make progress in
Europe subsequent to our CE Mark submission and in the U.S., where multiple phase 3 clinical studies continue
to enroll patients. On the commercial front, we reported our highest annual product revenue to date at $74.6
million. Looking to 2020 and beyond, we plan to build upon the positive commercial momentum that we saw in
2019 and leverage it as a foundation for future growth and validation of our underlying business model.
Long Anticipated FDA Guidance
Document for Platelet Safety Finalized
Since 2012, the FDA has held three Blood Products Advisory
Committee (BPAC) meetings to discuss platelets and the
risk of transfusion-transmitted bacterial infections. During
that timeframe, the Agency issued multiple draft guidance
documents on bacterial risk control strategies for platelets,
which were widely discussed and debated, and which ultimately
resulted in the final guidance issued September 2019. In
this final guidance, the FDA outlined single and multi-step
strategies that blood centers and hospitals can implement
to improve platelet safety. Pathogen-reduction (PR)
The guidance specifies several options for
blood centers and hospitals to mitigate
risk of bacterial contamination
Use the QR code here to view the figure
technologies were included as a single step option, and our INTERCEPT technology is currently the only FDA approved
platelet PR system. We think PR offers the most comprehensive solution for platelet safety, enabling the production
of fresher platelets, the elimination of redundant assays, and protection against a broad panel of pathogens beyond
bacteria. Hospitals and blood centers need to implement a solution for compliance with this new guidance by March
2021. Our goal is for INTERCEPT to be the standard of care for U.S. platelet safety in 2021.
A New Therapeutics Product Offering
Our efforts to expand our portfolio to include new therapeutic products continues to progress with the development
of our pathogen-reduced cryoprecipitate product, which is designed to be a source of fibrinogen and other coagulation
factors. Fibrinogen is commonly used to control massive bleeding in patients and is currently sourced primarily from
conventional cryoprecipitate in the U.S. Although not yet approved in the U.S. by the FDA, our pathogen reduced
cryoprecipitate product is designed with a longer, post-thaw shelf life as compared to conventional cryoprecipitate,
thereby enabling a transfusion ready product with the potential to substantially minimize wasted product. Our internal
market research indicates strong physician interest given the benefits conferred by a ready to use source of fibrinogen
and the corresponding impact on improved patient outcomes. This past year, we made an active decision to delay the
U.S. regulatory submission of our product by approximately six months to optimize the manufacturability, as well as
ease of use for the product in the hospital. Submission for U.S. regulatory approval is planned in mid-2020, which could
set the stage for U.S. approval by the end of 2020.
Solid Financial Position
We ended 2019 in a solid financial position with approximately
$85.7 million in cash, cash equivalents, and short-term investments
on the balance sheet. In January 2020, we strengthened our cash
position with a public offering of stock for gross proceeds of $63.3
million, before deducting offering expenses payable by the company.
Given our cash position and additional capital available through our
existing debt facilities, we are well positioned to fund our growth
initiatives to make INTERCEPT the global standard of care.
9
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Cerus’ Historical Product Revenue 2016 - 2019
COVID-19, The Risk of Emerging Infectious
Diseases, and our Mission
Over the past two decades, we have seen multiple emerging infectious diseases such as SARS, MERS, and COVID-19 as
well as mosquito-borne viruses like Zika, Chikungunya, and West Nile, and the only real surprise would be to not have
another one in the near future. These pathogens make their presence known quickly and with impact, via the human
toll of morbidity and mortality and the reverberation on societal infrastructure. Emerging pathogens pose an ongoing
threat to the safety and availability of the blood supply. Our corporate mission is as relevant today as it was 25+ years
ago when the company was founded.
During this challenging time, I wanted to extend my profound gratitude to all of the Cerus employees who have
continued to come to work to perform their essential duties and to help support our blood center customers during this
pandemic. The Cerus team’s resilience and commitment are uncommon, and our customers are surely appreciative of
these efforts.
Sincerely,
William “Obi” Greenman
President and Chief Executive Officer
April 24, 2020
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2019
OR
(cid:4) 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 000-21937
CERUS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1220 Concord Avenue, Suite 600,
Concord, California
(Address of principal executive offices)
68-0262011
(I.R.S. Employer
Identification No.)
94520
(Zip Code)
(925) 288-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.001 per share
Trading Symbol
CERS
Name of Each Exchange on Which Registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:3) No (cid:4)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:4) No (cid:3)
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 (cid:3) No (cid:4)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes (cid:3) No
(cid:4)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,”, “accelerated filer,”, “smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer (cid:3)
Accelerated filer (cid:4)
Non-accelerated filer (cid:4)
Smaller reporting company (cid:4) Emerging growth company (cid:4)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:31)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:4) No (cid:3)
The approximate aggregate market value of the common stock held by non-affiliates of the registrant as of June 28, 2019, the last business day of the registrant’s
most recently completed second fiscal quarter, based upon the closing sale price of the registrant’s common stock listed on the Nasdaq Global Market, was $771 million. (1)
As of February 10, 2020, there were 162,165,720 shares of the registrant’s common stock outstanding.
Portions of the registrant’s definitive proxy statement in connection with the registrant’s 2020 Annual Meeting of Stockholders, to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year ended December 31, 2019, are incorporated by reference
into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Based on a closing sale price of $5.62 per share on June 28, 2019. Excludes 2.9 million shares of the registrant’s common stock held by executive officers,
directors and stockholders that the registrant has concluded were affiliates at June 28, 2019.
[THIS PAGE INTENTIONALLY LEFT BLANK]
FORM 10-K
For the Fiscal Year Ended December 31, 2019
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Business.......................................................................................................................................................................
Risk Factors .................................................................................................................................................................
Unresolved Staff Comments........................................................................................................................................
Properties.....................................................................................................................................................................
Legal Proceedings .......................................................................................................................................................
Mine Safety Disclosures..............................................................................................................................................
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities......
Selected Financial Data ...............................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations .....................................
Quantitative and Qualitative Disclosures About Market Risk ....................................................................................
Financial Statements and Supplementary Data ...........................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .....................................
Controls and Procedures..............................................................................................................................................
Other Information........................................................................................................................................................
Directors, Executive Officers and Corporate Governance ..........................................................................................
Executive Compensation .............................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...................
Certain Relationships and Related Transactions, and Director Independence............................................................
Principal Accountant Fees and Services......................................................................................................................
Exhibits and Financial Statement Schedules...............................................................................................................
Form 10-K Summary...................................................................................................................................................
Page
2
16
51
51
52
52
53
54
55
67
67
67
68
70
71
71
71
71
71
72
77
SIGNATURES ................................................................................................................................................................................
106
[THIS PAGE INTENTIONALLY LEFT BLANK]
PART I
This Annual Report on Form 10-K 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 1, “Business,” Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” and in Item 1A, “Risk Factors.” These statements relate to future events or to
our future operating or financial performance and involve known and unknown risks, uncertainties and other factors that 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. These forward-looking statements may include, but are not
limited to, statements about:
•
•
•
•
•
•
•
•
•
•
•
•
future sales of and our ability to effectively commercialize and achieve market acceptance of the INTERCEPT™
Blood System, including our ability to comply with applicable United States, or U.S., and foreign laws, regulations and
regulatory requirements;
our ability to successfully complete development, receive regulatory approvals and commercialize extended-storage
cryoprecipitate or other plasma derived biological products using the INTERCEPT Blood System;
our ability to manage the growth of our business and attendant cost increases, including in connection with the
commercialization of the INTERCEPT Blood System in the U.S., as well as our ability to manage the risks attendant to
our international operations;
the timing or likelihood of regulatory submissions and approvals and other regulatory actions or interactions,
including timing of CE Mark approval for the red blood cell system;
our ability to obtain and maintain regulatory approvals of the INTERCEPT Blood System;
our ability to obtain adequate clinical and commercial supplies of the INTERCEPT Blood System from our sole source
suppliers for a particular product or component they manufacture;
the initiation, scope, rate of progress, results and timing of our ongoing and proposed preclinical and clinical trials of
the INTERCEPT Blood System;
the successful completion of our research, development and clinical programs and our ability to manage cost increases
associated with preclinical and clinical development of the INTERCEPT Blood System;
the amount and availability of funding we may receive under our agreement with the Biomedical Advanced Research
and Development Authority, or BARDA;
the ability of our products to inactivate the emerging viruses and other pathogens that we may target in the future;
our ability to protect our intellectual property and operate our business without infringing upon the intellectual
property rights of others; and
our estimates regarding the sufficiency of our cash resources and our need for additional funding.
In some cases, you can identify forward-looking statements by terms such as “anticipate,” “will,” “believe,” “estimate,” “expect,”
“plan,” “may,” “should,” “could,” “would,” “project,” “predict,” “potential,” 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 any of the events anticipated by forward-
looking statements will occur or, if any of them do occur, what impact they will have on our business, results of operations and
financial condition. Certain important factors could cause actual results to differ materially from those discussed in such
statements, including the rate of customer adoption in the U.S. and our ability to achieve market acceptance of our products in the
U.S. and international markets, 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 or for product extensions or additional claims for our
products, our ability to obtain reimbursement approval for our products, our ability to complete the development and testing of
additional configurations or redesigns of our products, our need for additional financing and our ability to access funding under
our agreement with BARDA, the impacts of regulation of our products by domestic and foreign regulatory authorities, our limited
experience in sales, marketing and regulatory support for the INTERCEPT Blood System, our reliance on Fresenius Kabi AG 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 our red blood cell system’s 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 expectation of continuing losses, protection of our intellectual
property rights, volatility in our stock price, on-going compliance with the requirements of the Sarbanes-Oxley Act of 2002, and
1
other factors discussed below and under the caption “Risk Factors,” in Item 1A of this Annual Report on Form 10-K. We discuss
many of these risks in this Annual Report on Form 10-K in greater detail in the section titled “Risk Factors” under Part I, 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 Annual Report on Form 10-K. You should read this
Annual Report on Form 10-K and the documents that we incorporate by reference in and have filed as exhibits to this Annual
Report on Form 10-K completely. Our actual future results may be materially different from what we expect. Except as required by
law, we assume no obligation to update or revise any forward-looking statements to reflect new information or future events, even
if new information becomes available in the future. You should not assume that our silence over time means that actual events are
bearing out as expressed or implied in such forward-looking statements.
Item 1.
Business
Overview
We are a biomedical products company focused on developing and commercializing the INTERCEPT Blood System to enhance blood
safety. The INTERCEPT Blood System, which is based on our proprietary technology for controlling biological replication, is
designed to reduce blood-borne pathogens in donated blood components intended for transfusion.
Our INTERCEPT Blood System is for use with three blood components: plasma, platelets, and red blood cells. The INTERCEPT
Blood System for platelets, or platelet system, and the INTERCEPT Blood System for plasma, or plasma system, have received a
broad range of regulatory approvals, including but not limited to U.S. Food and Drug Administration, or FDA, approval in the U.S.,
and Class III CE Marks in the European Union and other jurisdictions that recognize CE Mark approval, and are being marketed and
sold in a number of countries around the world, including the U.S., certain countries in Europe, the Commonwealth of Independent
States, or CIS, the Middle East, and Latin America and selected countries in other regions of the world. We sell both the platelet and
plasma systems using our direct sales force and through distributors. If we are unable to gain widespread commercial adoption in
markets where our blood safety products are approved for commercialization, including in the U.S., we will have difficulties achieving
profitability.
The INTERCEPT Blood System for red blood cells, or the red blood cell system, is currently in development. In the U.S., we
successfully completed a Phase 2 recovery and lifespan study in 2014, and are currently conducting two Phase 3 clinical trials. We
successfully completed our European Phase 3 clinical trial of our red blood cell system for acute anemia patients, and in January 2018,
we reported that the primary efficacy and safety endpoints were met in our European Phase 3 clinical trial for chronic anemia patients.
We filed for CE Mark approval of the red blood cell system in December 2018, though we will have to transition from the Medical
Device Directive, or MDD, to the Medical Device Regulation, or MDR, and do not expect an approval decision until 2022, if ever.
In order to successfully commercialize all of our products and product candidates, we will be required to conduct significant research,
development, preclinical and clinical evaluation, commercialization and regulatory compliance activities for our products and product
candidates, which, together with anticipated increased selling, general and administrative expenses, are expected to result in
substantial losses. Accordingly, we may never achieve a profitable level of operations in the future.
We were incorporated in California in 1991 and reincorporated in Delaware in 1996. Our wholly-owned subsidiary, Cerus Europe
B.V., was formed in the Netherlands in 2006. Information regarding our revenue, net loss, and total assets for the last three fiscal years
can be found in the consolidated financial statements and related notes found elsewhere in this Annual Report on Form 10-K.
Product Development
Background
The INTERCEPT Blood System is designed to broadly target and inactivate blood-borne pathogens, such as viruses (for example,
HIV, West Nile, SARS, hepatitis B and C), bacteria and parasites, as well as potentially harmful white blood cells, while preserving
the therapeutic properties of platelet, plasma and red blood cell transfusion products. The INTERCEPT Blood System has been shown
to inactivate a broad array of pathogens and has the potential to reduce the risk of transfusion related transmission of pathogens for
which testing is not completely effective, is not available or is not performed. We believe that the INTERCEPT Blood System also has
the potential to inactivate most new pathogens before they are identified and before tests are developed and adopted commercially to
detect their presence in donated blood.
2
Products, Product Candidates and Development Activities
The following table identifies our products, product candidates and product development activities and their current status:
Product or Product Candidate Under Development
Product or Development Status
INTERCEPT Blood System—Platelets
• Commercialized in the U.S. and a number of countries in Europe, the CIS, the
Middle East, and selected countries in other regions around the world
• Refiling for CE Mark under MDR planned for 2020
• U.S. post-approval haemovigilance study enrolling patients
INTERCEPT Blood System—Plasma
INTERCEPT Blood System—Red Blood Cells
• Commercialized in the U.S. and a number of countries in Europe, the CIS, the
Middle East, and selected countries in other regions around the world
• Refiling for CE Mark under MDR planned for 2020
• Extended-storage cryoprecipitate supplement under existing FDA approval
planned for 2020
• Phase 1 clinical trial completed in 2010
• U.S. Phase 2 recovery and lifespan study completed in 2014
• U.S. Phase 3 clinical trial, known as the RedeS study, enrolling patients
• U.S. Phase 3 acute anemia clinical trial, known as the ReCePI study, enrolling
patients
• Additional U.S. studies also planned
• European Phase 3 acute anemia clinical trial completed in 2014; European Phase
3 chronic anemia clinical trial completed in 2017
• European CE Mark submitted in December 2018; transition to MDR in 2020
INTERCEPT Blood System for Platelets and Plasma
The platelet system and plasma system are designed to inactivate blood-borne pathogens in platelets and plasma donated for
transfusion. Both systems received CE Mark approval in Europe and FDA approval in the U.S., and are currently marketed and sold in
a number of countries around the world including the U.S., Europe, the CIS, the Middle East and selected countries in other regions of
the world. Separate approvals for use of INTERCEPT-treated platelet and plasma products have been obtained in France and
Switzerland. In Germany and Austria, where approvals must be obtained by individual blood centers for use of INTERCEPT-treated
platelets and plasma, several centers have obtained such approvals for use of INTERCEPT-treated platelets and one center has
obtained such approval for use of INTERCEPT-treated plasma. Many countries outside of Europe accept the CE Mark and have
varying additional administrative or regulatory processes that must be completed before the platelet system or plasma system can be
made commercially available. In general, these processes do not require additional clinical trials. Regardless, some potential
customers may desire to conduct their own clinical studies before adopting the platelet system or plasma system. European Union
regulators have enacted legislation that requires all medical devices to comply with new MDR, beginning in May 2020. Our platelet
and plasma systems will need to be reapproved under this new regulation, accordingly.
The FDA has approved the platelet system for ex vivo preparation of pathogen-reduced apheresis platelet components collected and
stored in 100% plasma or InterSol in order to reduce the risk of transfusion-transmitted infection, or TTI, including sepsis, and to
potentially reduce the risk of transfusion-associated graft versus host disease. As part of the FDA’s approval of the platelet system, we
are required to successfully conduct and complete two post-approval studies - a haemovigilance study to evaluate the incidence of
acute lung injury following transfusion of INTERCEPT-treated platelets; and a recovery study of platelets treated with the platelet
system that is currently in discussion with FDA. The first patient enrolled in the haemovigilance study in December 2015. The FDA
has also approved the plasma system for ex vivo preparation of plasma in order to reduce the risk of TTI when treating patients
requiring therapeutic plasma transfusion. In 2018, the FDA granted Breakthrough Device Designation to our proposed extended-
storage cryoprecipitate after treatment with INTERCEPT. We plan to submit a supplement to our existing INTERCEPT plasma PMA
license for such a product.
Our commercial efforts in 2020 will largely be focused on enabling blood centers that are using INTERCEPT to optimize production
and increase the number of platelet and plasma units produced and made available to patients. In addition, we will continue to develop
awareness of INTERCEPT’s product profile relative to other platelet and plasma products, including conventional, un-treated
components. To enable broader patient access to INTERCEPT-treated products in the U.S., U.S.-based blood centers will need to
complete their process validations and obtain site-specific licenses from the FDA Center for Biologics Evaluation and Research, or
CBER, before making INTERCEPT-treated blood products available to their interstate hospital customers. Several blood centers have
3
submitted and received their interstate licenses, or BLAs. Until BLAs are obtained, U.S. blood centers will be limited to sell the
applicable INTERCEPT-treated blood components to hospital customers within the state in which the INTERCEPT-treated platelets
or plasma are processed. Further, the hospital customers of these blood centers may need complete changes to their administrative
processes of generating internal tracking codes to integrate INTERCEPT-treated products into their inventories prior to receiving
INTERCEPT-treated components. In addition, in order to address the entire market in the U.S., we will need to develop, test and
obtain FDA approval of additional configurations of the platelet system. For example, in the U.S., we understand a significant number
of platelet concentrates are derived from larger volumes collected from apheresis donors split into three therapeutic transfusable doses,
or triple doses. Although available in Europe, we will need to provide additional data to the FDA for a triple dose configuration of the
platelet system to treat platelet donations with such processing parameters. In addition, we estimate that the majority of platelets used
in the U.S. are collected by apheresis, which is part of our FDA-approved label for the platelet system, though a significant minority
are prepared from pooled random donor platelets derived from whole blood collections. While available in Europe and other regions
around the world, in order to gain FDA approval for a pathogen reduction system compatible with triple dose collections and random
donor platelets, we will need to perform additional product development and testing, including additional clinical trials, and will need
to obtain FDA approval of a premarket application, or PMA, supplement. In addition, we plan to perform in vitro studies and seek a
PMA supplement to use our plasma system to produce extended-storage cryoprecipitate and possibly other plasma derived biological
products. These development activities will be costly and may not be successful. Our failure to obtain FDA and foreign regulatory
approvals of these new configurations could significantly limit revenues from sales of our products.
INTERCEPT Blood System for Red Blood Cells
The red blood cell system is designed to inactivate blood-borne pathogens in red blood cells donated for transfusion. We completed a
series of in vitro and in vivo tests with the red blood cell system, including successfully completing recovery and survival studies
measuring red cell recovery twenty-four hours after transfusion. Previously, we terminated Phase 3 clinical trials for acute and chronic
anemia using a prior generation of the red blood cell system due to the detection of antibody reactivity to INTERCEPT-treated red
blood cells, or RBCs, in two patients in the trial for chronic anemia. The antibody eventually cleared and the patients had no adverse
health consequences. After unblinding the data from the original Phase 3 clinical trials, we found that we had met the primary
endpoint in the clinical trial for acute anemia. We evaluated the antibodies detected and developed process changes to diminish the
likelihood of antibody reactivity in RBCs treated with our modified process. Accordingly, we received authorization from European
regulators to proceed with Phase 3 clinical trials for acute anemia and, separately, chronic anemia. We announced the successful
completion of our Phase 3 clinical trial of the red blood cell system for acute anemia patients in January 2015 and for chronic anemia
patients in January 2018. We submitted our application for CE Mark approval in December 2018. Following our CE Mark submission,
we learned of the bankruptcy of one of our suppliers with whom we generated data used in our CE Mark submission. We do not
currently have a qualified manufacturer to produce a key reagent compound for our red blood cell system beyond our existing
inventory levels, which are in insufficient quantity to complete our clinical trials or launch a product commercially. While we are in
the process of identifying and qualifying manufacturers of our red blood cell reagent, qualification of any alternate supplier will be
time consuming. We understand that we will not have a new supplier qualified with acceptable data before being required to submit
for CE Mark approval under the MDR in May 2020. Accordingly, we will need to refile for CE Mark for our red blood cell system
once we have acceptable data from a qualified reagent manufacturer. We do not expect to receive any regulatory approvals of our red
blood cell system before 2022, if ever.
In January 2015, we announced that the completed European Phase 3 clinical trial of RBCs treated with the INTERCEPT Blood
System for acute anemia in cardiovascular surgery patients met its primary endpoint, with preliminary analysis demonstrating that the
mean hemoglobin content (53.1g) of INTERCEPT-treated RBCs, on day 35 of storage met the protocol-defined criteria for
equivalence based on the inferiority margin of 5g compared to conventional RBCs (55.8g). The randomized, double-blind, controlled,
multi-center Phase 3 clinical trial of the red blood cell system evaluated the efficacy of the red blood cell system to process RBCs with
quality and mean hemoglobin content (>40 g) suitable to support transfusion according to the European Directorate for the Quality of
Medicines. The blood components were transfused to 51 cardiovascular surgery patients at two German clinical trial sites to evaluate
transfusion efficacy and overall safety. There were no clinically relevant trends in severe or serious treatment related adverse events
by system organ class. The observed adverse events were within the expected spectrum of co-morbidity and mortality for patients of
similar age and with advanced cardiovascular diseases undergoing cardiovascular surgery requiring red cell transfusion. No patients
exhibited an immune response to INTERCEPT-treated RBCs. Additionally, in January 2018, we announced that the European Phase 3
clinical trial of chronic anemia evaluating INTERCEPT-treated RBCs in thalassemia patients met its primary efficacy and safety
endpoints. Regardless of the potential sufficiency of clinical data required to receive CE Mark approval, we may need to generate
additional safety data from commercial use in order to achieve broad market acceptance. As part of our development and chemistry,
manufacturing and control, or CMC, activities, we will need to successfully complete validation studies on sufficient quantities of the
final red blood cell system prior to receiving any regulatory approvals in Europe.
In the U.S., we successfully completed a Phase 2 recovery and lifespan study in 2014. In 2017, we initiated a double-blind Phase 3
clinical study, known as the RedeS study, to assess the safety and efficacy of INTERCEPT-treated RBCs when compared to
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conventional RBCs in regions impacted by the Zika virus epidemic. The RedeS study has been expanded to other areas at risk for
transfusion-transmitted infections due to the Zika virus, including Texas and Florida. The first stage of the trial is a double-blind,
controlled, parallel group trial where 600 adult patients will be randomized to receive up to 28 days of transfusion support with
INTERCEPT-treated RBCs or conventional RBCs, with a primary endpoint of hemoglobin increment following transfusion. In a
second optional stage, up to 20,000 patients would receive RBC transfusion support with up to 50,000 RBC units in an open-label,
single-arm treatment use study. Also in 2017, we received investigational device exemption, or IDE, approval from the FDA to initiate
a Phase 3 clinical trial, known as the ReCePI study, that is designed to evaluate the efficacy and safety of INTERCEPT-treated RBCs
in patients requiring transfusion for acute blood loss during surgery. A total of 600 patients are expected to be enrolled in the ReCePI
study in up to 20 participating sites in the U.S. Patients will be randomized on a 1:1 basis with patients in the treatment arm transfused
with RBCs treated with INTERCEPT and patients in the control arm transfused with conventional RBCs. The primary efficacy
endpoint is the proportion of patients experiencing acute kidney injury as an assessment of RBC efficacy in providing tissue
oxygenation, measured as an increase in serum creatinine compared to pre-surgery, baseline levels within 48 hours after the surgery.
Enrollment in the ReCePI study is underway at several sites and is expected to expand to as many as nineteen sites. Enrollment in the
ReCePI study began in 2019. The RedeS and ReCePI studies are being funded as part of our agreement with BARDA. In addition to
successfully conducting and completing the RedeS and ReCePI studies, we will need to successfully conduct and complete an
additional Phase 3 clinical trial for chronic anemia in the U.S. before the FDA will consider our red blood cell product for approval.
We also understand that one or more additional in vitro studies will be required to be successfully completed and submitted to the
FDA prior to any initiation of an additional Phase 3 clinical trial for chronic anemia. There can be no assurance that we will be able to
successfully satisfy any such in vitro studies, nor can there be any assurance that we and the FDA will agree to any trial protocol we
propose or that we will otherwise obtain FDA clearance to initiate an additional Phase 3 clinical trial for chronic anemia. The FDA
recently agreed to modify the criteria for a clinical pause if we see three or more treatment emergent antibodies with amustaline
specificity without hemolysis in patients receiving INTERCEPT-treated RBCs in our RedeS study. We will now be allowed to
continue study enrollment for the RedeS study while we investigate the clinical significance of the antibodies. If we determine that
there is no clinical significance and no impact on patients, then there will be no impact on study enrollment. If treatment emergent
antibody reactions associated with hemolysis are observed in any of our Phase 3 trials, the FDA will require us to place a clinical hold
and we will need to investigate the underlying cause, which in many patient populations may be difficult for us to assess imputability
which may lead to a complete halt of the clinical trial, may irreparably harm our red blood cell product’s reputation and may force us
to suspend or terminate development activities related to the red blood cell system in the U.S., which would have a material adverse
effect on our business and business prospects.
Additional information regarding our interactions with the FDA, and potential future clinical development of the INTERCEPT Blood
System in Europe and in the U.S. can be found under “Item 1A—Risk Factors” of this Annual Report on Form 10-K, under the risk
factor titled “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 country’s regulatory
authorities to grant marketing approval, we will be unable to commercialize our products and generate revenue in that country. Our
investigational red blood cell system requires extensive additional testing and development.”
Information regarding our revenues for the years ended December 31, 2019, 2018 and 2017 can be found in “Item 7— Management’s
Discussion and Analysis of Financial Condition and Results of Operations”, and “Financial Statement Schedules—Financial
Statements” of this Annual Report on Form 10-K.
INTERCEPT Blood System Technology
Both our platelet system and plasma system employ the same technology. Platelet or plasma components collected from blood donors
are transferred into plastic INTERCEPT disposable kits and are mixed with our proprietary compound, amotosalen, a small molecule
compound that has an affinity for nucleic acid.
The disposable kits are then placed in an illumination device, or illuminator, where the mixture is exposed to ultra-violet A, or UVA,
light. If pathogens such as viruses, bacteria or parasites, as well as leukocytes, or white cells, are present in the platelet or plasma
components, the energy from the UVA light causes the amotosalen to bond with the nucleic acid. Since platelets and plasma do not
rely on nucleic acid for therapeutic efficacy, the INTERCEPT Blood System is designed to preserve the therapeutic function of the
platelet and plasma components when used in human transfusions.
The ability of amotosalen to form both cross-links between strands of nucleic acid and links to single nucleic acid strands results in a
strong chemical bond between the amotosalen and the nucleic acid of the pathogens. The presence of these bonds is designed to
prevent replication of the nucleic acid within pathogens, effectively inactivating the pathogens. A high level of inactivation has been
demonstrated in a broad range of pathogens studied by us and others in laboratory testing. For instance, INTERCEPT has
demonstrated inactivation of a number of single stranded nucleic acid-based viruses such as HIV, hepatitis B, hepatitis C (using a
model virus), West Nile, chikungunya and certain influenza viruses.
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Following the inactivation process, residual amotosalen and by-products are reduced by more than 99% through use of a compound
adsorption device, which is an integrated component of the disposable kit. We have performed extensive toxicology testing on the
residual amotosalen and its by-products and good safety margins have been demonstrated. Any remaining amotosalen which may be
transfused, should any exist, is rapidly excreted by humans.
Leukocytes, also known as white blood cells, are typically present in platelet and plasma components collected for transfusion and can
cause adverse transfusion reactions as well as an often fatal disease called graft-versus host disease. Leukocytes, like pathogens, rely
on nucleic acid for replication and cellular function. The INTERCEPT Blood System, with its combination of the amotosalen and
UVA light, is designed to inactivate leukocytes in the same manner it inactivates pathogens.
Like the platelet and plasma systems, the red blood cell system is designed to prevent pathogen replication by using a small molecule
additive compound to form bonds with nucleic acid in pathogens that may be present in donated red blood cell collections. The red
blood cell system is designed to preserve the therapeutic qualities of the red blood cells, which, like platelets and plasma, do not rely
on nucleic acid for their therapeutic efficacy. The red blood cell system uses another of our proprietary compounds, amustaline.
Unlike the platelet and plasma systems, the chemical bonds from amustaline are not triggered by UVA light, but instead, by the pH
level of the red blood cell components. After mixture with the red blood cell components in plastic disposable kits and resulting
nucleic-acid bonding, amustaline is designed to rapidly break down into a form that is no longer chemically reactive with nucleic acid.
As with the platelet and plasma systems, a high level of inactivation in a broad range of pathogens has been demonstrated with the red
blood cell system in the clinical setting. We plan on conducting additional pathogen-inactivation studies of the red blood cell system,
broadening our understanding of the pathogens the system may be able to inactivate.
By treating blood components with INTERCEPT within a day of collection, the inactivation of bacteria prevents bacterial growth that
could create increased risk of inflammatory response or dangerous levels of endotoxins. Extensive clinical testing has been done on
platelet and plasma products treated with the INTERCEPT Blood System, as well as post-marketing haemovigilance studies of the
treated blood products in routine use.
We believe that, due to their mechanisms of action, the platelet system, plasma system, and red blood cell system will potentially
inactivate blood-borne pathogens that have not yet been tested with our systems, including emerging and future threats to the blood
supply. We do not claim, however, that our INTERCEPT Blood System will inactivate all pathogens, including prions, and our
inactivation claims are limited to those contained in our product specifications. There can also be no assurance that INTERCEPT will
inactivate even those pathogens where claims exist, in every instance or under every processing condition.
Manufacturing and Supply
We have used, and intend to continue to use, third parties to manufacture and supply the devices, disposable kits and inactivation
compounds that make up the INTERCEPT Blood System for use in clinical trials and for commercialization. We rely solely on
Fresenius Kabi AG, or Fresenius, for the manufacture of disposable kits for the platelet and plasma systems and rely on other contract
manufacturers for the production of our inactivation compounds, compound adsorption components of the disposable kits and
illuminators used in the INTERCEPT Blood System. We currently do not have alternate manufacturers for the components in our
products or product candidates beyond those that we currently rely on, but we are currently in the process of identifying potential
alternate manufacturers. Under our amended and restated manufacturing and supply agreement we entered into with Fresenius in
October 2015, Fresenius is obligated to sell, and we are obligated to purchase, finished disposable kits for our platelet, plasma and red
blood cell systems. The agreement permits us to purchase platelet, plasma and red blood cell systems from third parties to the extent
necessary to maintain supply qualifications with such third parties or where local or regional manufacturing is needed to obtain
product registrations or sales. Pricing terms are initially fixed and decline at specified annual production levels. The agreement
contemplated that we and Fresenius jointly fund and collaborate on certain specified initiatives focused on new product development
or enhancements, potential implementation of automation, installation of new equipment, capacity expansion and cost reduction. We
were required to make contributions toward those joint collaboration projects in certain specified installment amounts. In addition, we
made a one-time, lump sum payment of €5.5 million in 2019. The term of the agreement with Fresenius extends through July 1, 2025,
and will automatically renew for successive additional two-year periods unless terminated by either party upon two years’ prior
written notice, in the case of the initial term, or one year prior written notice, in the case of any renewal term. We and Fresenius each
have normal and customary termination rights, including termination for material breach. Pricing under the agreement is established
through 2020 and at which time new pricing will need to be agreed upon by both parties or calibrated off of the pre-existing prices
using a price index for the remainder of the initial term.
Components of the compound adsorption devices used in our platelet and plasma disposable kits are manufactured by Porex
Corporation, or Porex. In April 2017, we entered into an amended and restated manufacturing and supply agreement with Porex for
the continued supply of the compound adsorption devices. Porex is our sole supplier for certain components of and manufacturing of
the compound adsorption devices. Under the amended and restated Porex agreement, we are no longer subject to a minimum annual
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purchase requirement; however, Porex has the right to terminate the agreement, upon twelve months’ prior written notice, if annual
production falls below a mutually agreed threshold. The amended and restated Porex agreement was renewed as of January 1, 2020,
for an additional two years. Although we are actively seeking to develop alternative manufacturers and components, commercially
viable alternatives are likely several years away.
We also have an amended and restated supply agreement with Brotech Corporation d/b/a Purolite Company, or Purolite, for the supply
of raw materials used to make the compound adsorption devices. The amended supply agreement expires in April 2021 and will
automatically renew for an additional year unless either party has provided notice not to renew at least two years prior to the
expiration. Under the terms of the amended agreement, pricing is volume based and is subject to annual, prospective adjustments
based on a Producer Price Index subject to an annual cap.
Pursuant to a contract that we and Nova Biomedical Corporation, or Nova, entered into in September 2008, Nova is manufacturing
illuminators for us. The term of our agreement with Nova automatically renews for successive one-year terms each September in the
event neither party delivers written notice of its intent to terminate twelve months prior to each September renewal date. In February
2019, we entered into an agreement with Nova for the purchase of components that may become obsolete and for other components to
build illuminators. We agreed to prepay for certain of such components before they are converted into finished illuminators over a
protracted period. We do not currently have plans to terminate our agreement with Nova and believe that Nova currently plans to
continue operating under the agreement for the foreseeable future.
We operate with an amended manufacturing and supply agreement with Ash Stevens, Inc., or Ash Stevens, for the synthesis of
amotosalen, the inactivation compound used in our platelet and plasma systems. Under this amended agreement, we are subject to
minimum annual purchase requirements. We have incurred these maintenance fees in the past. The term of the amended
manufacturing and supply agreement with Ash Stevens automatically extended at the end of 2019 and now continues until
December 31, 2021, and will continue to automatically renew for successive two-year periods, unless terminated by either party upon
providing at least one year prior written notice, in our case, or at least two years prior written notice, in the case of Ash Stevens.
Neither party has delivered notice of its intent to terminate the agreement.
We and our contract manufacturers, including Fresenius and Nova, purchase certain raw materials for our disposable kits, inactivation
compounds, materials and parts associated with compound adsorption devices and UVA illuminators from a limited number of
suppliers. Some of those raw material suppliers require minimum annual purchase amounts. While we believe that there are alternative
sources of supply for such materials, parts and devices, we have not validated or qualified any alternate manufacturers. As such,
establishing additional or replacement suppliers for any of the raw materials, parts and devices, if required, will likely not be
accomplished quickly and could involve significant additional costs and potential regulatory reviews. For example, certain solvents
used to make the plastic beads in the compound adsorption devices are no longer available. We will need to qualify plastic beads
produced with a new solvent prior to consuming existing inventory levels.
Certain regions that we sell into or may sell into in the future may give priority to those products that are manufactured locally in their
jurisdiction. Our failure to meet these local manufacturing conditions may prevent us from successfully commercializing our product
in those geographies. In addition, should we choose to manufacture locally in those jurisdictions, we would likely incur additional
costs, may be unable to meet our quality system requirements or successfully manufacture products, and such activities will be a
distraction from our current focus and operations. We have no experience manufacturing or working with manufacturers outside of
our current manufacturing footprint.
Marketing, Sales and Distribution
The market for the INTERCEPT Blood System, including the U.S. market, is dominated by a relatively small number of blood
collection organizations. Accordingly, there may be an extended period during which some potential U.S.-based customers may first
choose to validate our technology or run experience studies themselves before deciding to adopt the system for commercial use, which
may never occur. The American Red Cross represents the largest single portion of the blood collection market in the U.S. While we
believe adoption of the INTERCEPT Blood System will afford the American Red Cross with many benefits, we cannot guarantee the
volume or timing of commercial purchases that the American Red Cross may make, if any, under our multi-year commercial
agreement with the American Red Cross. Furthermore, the U.S. blood banking market is undergoing consolidation which may
continue and further concentrate the potential customer base. 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. The largest European markets for our products are in Germany, France, and England.
In Germany, decisions on product adoption are made on a regional or blood center-by-blood center basis. While our obtaining CE
Mark approval allows us to sell the platelet and plasma systems to blood centers in Germany, blood centers in Germany must still
obtain both local manufacturing approval and national marketing authorization from the Paul Ehrlich Institute, or PEI, a German
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governmental regulatory body overseeing the marketing authorization of certain medical products, before being allowed to sell platelet
and plasma components treated with the INTERCEPT Blood System to transfusing hospitals and physicians. To date, several blood
centers in Germany have received such requisite approvals and authorizations for the platelet system. Given the competitive nature of
the German blood banking market, pricing for blood components is relatively low compared to other markets. INTERCEPT-treated
platelets received national reimbursement in Germany in 2018 at a premium to untreated platelets. While this dynamic has the
potential to generate economic value for blood centers in Germany, we cannot ensure that blood centers will understand or act on the
potential economic and logistical benefits of using INTERCEPT compared to conventional blood components as well as the potential
safety benefits of INTERCEPT-treated blood components. Following the inclusion of pathogen-inactivated platelets for national
reimbursement by the German Institute for the Hospital Remuneration System as of January 1, 2018, German customers who do not
currently have an approved marketing authorization application, or MAA, will first need to obtain one before using the INTERCEPT
Blood System. The review period for a new MAA can be up to twelve months or longer following submission and we cannot predict
which German customers or potential customers will obtain an MAA. Without broad approvals of MAA applications obtained by
potential German customers, our ability to successfully commercialize INTERCEPT in Germany will be negatively impacted, which
may adversely affect the potential for growth in that region. In addition, the reimbursement awarded to INTERCEPT in Germany may
not be considered by German blood centers as attractive enough to implement pathogen reduction or cover the entirety of their blood
center platelet collections which may in turn limit the market acceptance in Germany. We do not yet know how German blood centers
plan to market and sell to their hospital customers or which steps are needed at the hospital level in Germany to administer pathogen-
reduced platelets. Should German hospitals object, or are slow implementing the steps needed to procure and administer pathogen
reduced platelets, our market in Germany many be limited or be slow to realize acceptance.
In France, broad product adoption is dependent on a central decision by the Établissement Français du Sang, or EFS, a public
organization responsible for all collection, testing preparation and distribution of blood products in France. In July 2017, we entered
into new agreements with EFS to supply illuminators, platelet and plasma disposable kits. The agreement for supply of illuminators
and platelet disposable kits provided for a base term of two years, with two options for EFS to extend for one year each, the first of
which, EFS exercised in 2019. In January 2020, we entered into a new agreement with EFS to supply plasma disposable kits and
maintenance services for illuminators for a base term of two years, with two options for EFS to extend for one year each. While EFS
has standardized production of its platelets using the INTERCEPT Blood System, we cannot provide any assurance that the national
deployment of INTERCEPT to treat platelets in France will be sustainable, or that we will be able to secure any subsequent contracts
with EFS or that the terms, including the pricing or committed volumes, if any, of any future contract will be equivalent or superior to
the terms under our current contract. If we are unable to continue to successfully support EFS’ national adoption of the INTERCEPT
Blood System for platelets, EFS’ use of the INTERCEPT Blood System for Plasma or the final commercial terms of any subsequent
contract for platelet or plasma disposable kits are less favorable than the terms under our existing contracts, our financial results may
be adversely impacted.
In England, decisions on product adoption are centralized in the National Blood Service, or NHSBT, which collects, tests, processes
and supplies blood products to hospitals in England and North Wales. The National Blood Service has implemented and used bacterial
detection for platelets for the past several years instead of pathogen inactivation. More recently, the National Blood Service has
implemented the INTERCEPT Blood System for platelets in one of its centers for validation of the technology. In July 2015, the
National Blood Service issued a public tender to solicit bids for both pathogen inactivation and bacterial detection, to which we
responded. In December 2015, the National Blood Service announced that it had terminated the potential tender for pathogen
inactivation. We do not know when, if ever, the NHBST will consider adoption of a product for pathogen reduction, including
INTERCEPT.
In Japan, the Japanese Red Cross controls a significant majority of blood centers and exerts a high degree of influence on the adoption
and use of blood safety measures. The Japanese Red Cross has been reviewing preclinical and clinical data on pathogen reduction of
blood over a number of years and has yet to make a formal determination to adopt any pathogen reduction approach. Before the
Japanese Red Cross considers our products, we understand that we may need to complete certain product configuration changes,
which may not be economically or technologically feasible for us to complete.
In 2018, the FDA granted Breakthrough Device Designation to our proposed extended-storage INTERCEPT-treated cryoprecipitate,
or INTERCEPT cryo. We do not know and cannot assure that such designation will expedite or ensure approval of such a product in
the near term or ever. We have entered into manufacturing agreements with certain blood centers to produce INTERCEPT cryo for us.
In order to successfully commercialize INTERCEPT cryo, we will need to influence the market and sell directly to hospital users of
cryoprecipitate and may need to add resources to our existing commercial teams to commercialize INTERCEPT cryo. We do not
know if INTERCEPT cryo will be perceived as economically attractive to hospital customers or at what price, if any, or if the
investment needed to sell INTERCEPT cryo will be sustainable should we obtain approval of the PMA supplement for such a product.
Market adoption of our products is affected by blood center and healthcare facility budgets and the availability of reimbursement from
governments, managed care payors, such as insurance companies, and/or other third-party payors. In many jurisdictions, due to the
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structure of the blood products industry, we have little control over budget and reimbursement discussions, which generally occur
between blood centers, healthcare facilities such as hospitals, and national or regional ministries of health and private payors. Even if a
particular blood center is prepared to adopt the INTERCEPT Blood System, its 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 some pathogens prior to transfusion, even after implementing our products, some blood centers may not be
able to identify enough cost offsets or hospital pricing increases to afford to purchase our products. Budgetary concerns may be further
exacerbated by economic legislation in certain countries and by proposals by legislators at both the U.S. federal and state levels,
regulators, healthcare facilities and third-party payors to keep healthcare costs down, which may limit the adoption of new
technologies, including our products. In some jurisdictions, commercial use of our products may not be covered by governmental or
commercial third-party payors for health care services and may never be covered. In the U.S., the costs and expenses incurred by the
blood center related to donor blood are typically included in the price that the blood center charges a hospital for a unit of blood. The
Centers for Medicare & Medicaid Services published a separate reimbursement code and premium pricing for pathogen-reduced
platelet and plasma components under the Healthcare Common Procedure Coding System, or HCPCS. The reimbursement pricing for
our products under HCPCS is driven by actual costs charged to hospitals for INTERCEPT-treated components. Even though blood
components treated with our products are approved for reimbursement by governmental or commercial third-party payors, including
under HCPCS codes, the costs and expenses related to use of the INTERCEPT Blood System are not directly reimbursed, but instead
may be incorporated within the reimbursement structure for medical procedures and/or products at the site of patient care. If the costs
to the hospital for INTERCEPT-processed blood products cannot be easily, readily, or fully incorporated into the existing
reimbursement structure, hospital billing and/or reimbursement for these products could be impacted, thus negatively impacting
hospitals’ acceptance and uptake of our products.
We maintain a wholly-owned subsidiary, Cerus Europe B.V., headquartered in the Netherlands, which focuses its efforts on marketing
and selling the INTERCEPT Blood System in a number of countries in Europe, the CIS, the Middle East and selected countries in
other regions around the world. We have a small scientific affairs group in the U.S. and the Netherlands that supports our
commercialization efforts as well as hospital affairs professionals, to help educate hospitals and physicians on our products, clinical
trial history and publications. We have a small group of individuals which we may add to in the future to market and sell INTERCEPT
cryo in the U.S. We have a small number of employees focused on servicing the markets in Asia-Pacific and Latin American regions
and rely primarily on distributors to market and sell our products in those regions.
We have entered into distribution agreements, generally on a geographically exclusive basis, with distributors in countries where we
have limited abilities to commercialize our products directly. In certain of these jurisdictions, we rely on these distributors to obtain
any necessary in-country regulatory approvals, in addition to marketing and selling the INTERCEPT Blood System, providing
customer and technical product support, maintaining inventories, and adhering to our quality system in all material respects, among
other activities. Selected areas where we have entered into geographically exclusive distribution agreements include but are not
limited to certain countries in the CIS, Italy, the Middle East, Latin America, South Africa and Southeast Asia, as well as the People’s
Republic of China. Our success in these regions is dependent on our ability to support our distributors and our distributor’s ability to
market and sell our products and to maintain and service customer accounts, including technical service. Our distribution agreements
account for a significant amount of our revenues. As such, declining performance or the outright termination or loss of certain
distributor relationships could harm our existing business, may impact our growth potential, and could result in higher operating costs
for us. As our distributors play a critical role in our commercialization efforts, we evaluate their performance on an ongoing basis. As
we continue to evaluate our distributors, we may take further actions in the future which may have an impact on our operating results.
In the past, we have transitioned certain territories to new distribution partners who we felt were capable of improved performance
relative to their predecessors as well as transitioned some of these territories to a Cerus direct sales effort, which we believed would
provide us with better visibility into and control of sales execution. We may undertake similar changes in the future. As a result, we
may experience a decrease in the volume of INTERCEPT disposable kit sales for the impacted territories as outgoing distribution
partners sell through their disposable kit inventory. In addition, any new distributors or our own direct sales force may require some
time to develop the market with the same proficiency as previous distributors. We cannot provide assurance that any such changes will
achieve the same level of operations or proficiency as previous distributors.
Government Contract
Revenue from the cost reimbursement provisions under our government contract varies by year. A portion of our government contract
revenue is subject to renegotiation of reimbursement rates or termination of the contract at the election of the U.S. government. In
addition, U.S. government contracts typically contain unfavorable provisions and are subject to audit and modification by the
government at its sole discretion. Generally, government contracts, including our agreement with BARDA, contain provisions
permitting unilateral termination or modification, in whole or in part, at the U.S. government’s convenience. See Note 2 in the Notes
to Consolidated Financial Statements under “Item 15—Financial Statement Schedules—Financial Statements” of this Annual Report
on Form 10-K for information on our government contract revenue and other financial information for the years ended December 31,
2019, 2018 and 2017. Further discussion of the factors impacting our government contracts revenue and the related impact on our
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ability to operate our business can be found under “Item 1A—Risk Factors” of this Annual Report on Form 10-K, under the risk
factors titled “A significant portion of the funding for the development of the red blood cell system is expected to come from our
BARDA agreement, and if BARDA were to eliminate, reduce or delay funding from our contract, this could have a significant,
negative impact on our revenues and cash flows, and we may be forced to suspend or terminate our U.S. red blood cell development
program or obtain alternative sources of funding” and “Unfavorable provisions in government contracts, including in our contract
with BARDA, may harm our business, financial condition and operating results.”
Competition
Our products face a wide variety of competition from entities competing directly with alternative pathogen reducing technologies for
platelets and/or plasma, as well as from entities developing and selling diagnostic screening products to detect and prevent
contaminated products from being transfused, and from process and procedural decisions involving blood banking operations
including but not limited to shortened shelf-life of blood components. Many of our competitors have mature, well-established products
or have other products which are sold to U.S. based blood centers and many have more commercial resources than we do. In addition,
competitors may choose to seek a lower class of approval than our products, which may be easier and less costly for them to maintain
and may be perceived as sufficient by the marketplace. We believe that the INTERCEPT Blood System has certain competitive
advantages over competing blood-borne pathogen reduction methods that are either on the market or known to us to be in
development. The INTERCEPT Blood System is designed for use in blood centers, which allows for integration with current blood
collection, processing and storage procedures. Certain competing products currently on the market, such as solvent detergent-treated
plasma, use centralized processing that takes blood products away from the blood center in order to be treated at a central facility
before being shipped back out to the blood centers or hospitals for ultimate transfusion, which may result in higher costs.
In Europe, several companies, including Grifols S.A., Octapharma AG, MacoPharma International and Kedrion Biopharma, are
developing or selling commercial pathogen reduction systems or services to treat fresh frozen plasma. Terumo BCT, a subsidiary of
Terumo Corporation, has developed a pathogen reduction system for blood products and has been issued Class II CE Marks for such
system for both platelets and plasma. MacoPharma has received a CE Mark for a UVC-based pathogen reduction product for platelets.
MacoPharma recently completed a Phase 3 clinical trial in Germany to generate additional data for expanded approvals. We
understand that Terumo BCT also developed a pathogen reduction system for whole blood receiving a Class II CE Mark. Terumo
BCT’s products may offer certain competitive advantages over our INTERCEPT Blood System.
In the U.S., INTERCEPT-treated plasma faces competition from Octapharma AG, which is currently commercializing treated fresh
frozen plasma for certain indications in the U.S., as well as from diagnostic and testing companies currently approved for the detection
of pathogens in donated blood products, including bacterial and viral pathogens. Our platelet product faces competition from a number
of diagnostic and testing companies currently approved for the detection of pathogens including bacterial and viral pathogens in
donated blood products and may face competition from other technologies if approved.
Terumo BCT’s platelet, plasma or whole blood pathogen reduction product may be viewed as favorable by the Japanese Red Cross.
Terumo Corporation is a large Japan-based, multinational corporation with more mature products and relationships than we have. Our
ability to commercialize our products in certain markets, particularly in Japan, may be negatively affected by Terumo’s resources and
their pre-existing relationships with regulators and customers. Should Terumo BCT’s product be approved for use and commercialized
in Japan, we would likely directly compete with them and we believe we would likely need to either establish operations in Japan or
partner with a local Japanese company.
We believe that the primary competitive factors in the market for pathogen reduction of blood products include the breadth and
effectiveness of pathogen reduction processes, the amount of demonstrated reduction in transfusion related adverse events subsequent
to adopting pathogen reduction technology, robustness of treated blood components upon transfusion, the scope and enforceability of
patent or other proprietary rights, perceived product value relative to perceived risk, product supply, perceived ease of use, perception
of safety, efficacy and economics of pathogen reduction systems, and marketing and sales capability. In addition, we believe the
length of time required for products to be developed and to receive regulatory and, in some cases, reimbursement approval are also
important competitive factors. We believe that the INTERCEPT Blood System will compete favorably with respect to these factors,
although there can be no assurance that it will be able to do so. Our success will depend in part on our ability to convince prospective
customers of the benefits of and need to adopt pathogen reduction technology and specifically our system relative to other
technologies, our ability to obtain and retain regulatory approvals for our products, and our ability to continue supplying quality and
effective products to our customers and prospective customers.
Further discussion of the major competitors to our blood product business can be found under “Item 1A—Risk Factors” of this Annual
Report on Form 10-K, under the risk factor titled “If our competitors develop products superior to ours, market their products more
effectively than we market our products, or receive regulatory approval before our products, our commercial opportunities could be
reduced or eliminated.”
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Patents, Licenses and Proprietary Rights
Our commercial success will depend in part on our ability to obtain patents, to protect trade secrets, to operate without infringing upon
the proprietary rights of others and to prevent others from infringing on our proprietary rights. Our policy is to seek to protect our
proprietary position by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology,
inventions and improvements that are important to the development of our business. As of December 31, 2019, we owned six issued
or allowed U.S. patents and approximately 66 issued or allowed foreign patents related to the INTERCEPT Blood System. Our patents
expire at various dates between 2020 and 2031. Recent patent applications will, if granted, result in patents with later expiration dates.
In addition, we have a license from Fresenius to U.S. and foreign patents relating to the INTERCEPT Blood System, which expire at
various dates between 2020 and 2024. Due to the complexity of our products, we believe it is the protection afforded to our products
by the portfolio of intellectual property rights that best protect our proprietary system rather than any one particular patent or trade
secret. Proprietary rights relating to our planned and potential products will be protected from unauthorized use by third parties only to
the extent that they are covered by valid and enforceable patents or are effectively maintained as trade secrets. The laws of certain
foreign countries do not protect our intellectual property rights to the same extent as do the laws of the U.S.
We are aware of a recently expired U.S. patent issued to a third-party that covers methods to remove psoralen compounds from blood
products. We have reviewed the patent and believe there exist 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. In this regard, whether or
not we have infringed this patent will not be known with certainty unless and until a court interprets the patent in the context of
litigation. In the event that we are found to infringe any valid claim of this patent, we may, among other things, be required to pay
damages. Further discussion of the factors impacting our intellectual property and the related impact on our ability to operate our
business can be found under “Item 1A—Risk Factors” of this Annual Report on Form 10-K, under the risk factor titled “We may not
be able to protect our intellectual property or operate our business without infringing intellectual property rights of others.”
Seasonality
Our business is dependent on the marketing and commercialization of the INTERCEPT Blood System to customers such as blood
banks, hospitals, distributors and other health care providers that have a need for a pathogen reduction system to treat blood products
for transfusion. Since we have not experienced purchasing patterns from our customers based on seasonal trends, we do not expect
seasonality to have a material effect on our business, although purchasing patterns and inventory levels can fluctuate.
Inventory Requirements and Product Return Rights
Our platelet and plasma disposable kits have received regulatory approval for shelf lives from 18 to 24 months. Illuminators and
replacement parts do not have regulated expiration dates. We own work-in-process inventory for certain components of INTERCEPT
disposable kits, finished INTERCEPT disposable kits, illuminators, and certain replacement parts for our illuminators. Our supply
chain for certain of these components, held as work-in-process on our consolidated balance sheets, may potentially take over one year
to complete production before being utilized in finished disposable kits. We maintain inventory 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. 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 or conversely, may be insufficient to meet an increase in demand for our products.
Inventory is recorded at the lower of cost, determined on a first in, first out basis, or market value. 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. We rely on our direct sales team and distributors to provide accurate forecasts of sales in their territory. If our
forecasts or those of our distributors are inaccurate, we could face backlog situations or conversely, may produce and carry an
abundance of inventory that would consume cash faster than we have currently planned. Generally, we write-down specifically
identified unusable, 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. Any 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.
We sell the INTERCEPT Blood System directly to blood banks, hospitals, universities, and government agencies, as well as to
distributors in certain regions. Generally, our contracts with our 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.
Research and Development Expenses
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A significant portion of our operating expenses is related to research and development and we intend to maintain a strong commitment
to our research and development efforts. As we look ahead, we anticipate that the regulatory submission processes related to planned
PMA supplements for the platelet and plasma systems in the U.S. will require continued investment in research and development
activities, as will our ongoing clinical, development and CMC work for our red blood cell system in Europe. We are pursuing a PMA
supplement for INTERCEPT cryo which will require that we perform certain tests and in vitro studies which will add to our research
and development costs. In the U.S., we expect to incur increasing research and development expenses associated with pursuing
licensure of the red blood system including the RedeS study, the ReCePI study and an additional Phase 3 clinical trial for chronic
anemia in the U.S., in vitro studies, and other activities to pursue FDA approval of our red blood cell system. To the extent available,
many of the U.S. red blood cell activities may be reimbursed by BARDA, though no guarantee can be made that our progress will be
satisfactory to BARDA or that funds will be available to either BARDA or us. In addition, we plan to continue spending on new
product development and enhancements to our illumination device which may increase research and development expenses. See Note
2 in the Notes to Consolidated Financial Statements under “Financial Statement Schedules—Financial Statements” of this Annual
Report on Form 10-K for costs and expenses related to research and development, and other financial information for the years ended
December 31, 2019, 2018 and 2017.
Government Regulation
We and our products are comprehensively regulated in the U.S. by the FDA and by comparable governmental authorities in other
jurisdictions.
Our European investigational plan has been based on the INTERCEPT Blood System being categorized as Class III drug/device
combination under the MDD, of the European Union. Medical devices, including INTERCEPT will need to be re-registered and
approved under a new MDR, subsequent to May 2020.
The European Union requires that medical devices affix the CE Mark, an international symbol of adherence to quality assurance
standards and compliance with the MDD and subsequent to May 2020, the MDR. We initially received the CE Mark for our platelet
system and separately for our plasma system in 2002 and 2006, respectively. While we are currently seeking an extension of
registration under the MDD, and plan to re-register our platelet and plasma products under the MDR, we cannot assure you that an
extension under the MDD will be granted timely, if at all, or that our products will timely meet the requirements of the new MDR. A
separate CE Mark certification must be received for the red blood cell system to be sold in the European Union and in other countries
recognizing the CE Mark. While we have filed for CE Mark approval of our red blood cell system under the MDD, we will need to
refile and obtain approval under the new MDR which we do not expect will occur until 2022, if ever. In addition, France, Switzerland,
Germany, and Austria require separate approvals for INTERCEPT-treated blood products.
The FDA regulates drugs, medical devices and biologics under the Federal Food, Drug, and Cosmetic Act and other laws, including,
in the case of biologics, the Public Health Service Act. These laws and implementing regulations govern, among other things, the
development, testing, manufacturing, record keeping, storage, labeling, advertising, promotion and pre-market clearance or approval
of products subject to regulation. The steps required before a medical device may be approved for marketing in the U.S. pursuant to a
PMA include:
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•
•
•
•
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preclinical laboratory and animal tests;
submission to the FDA of an investigational device exemption for human clinical testing, which must become effective
before human clinical trials may begin;
appropriate tests to show the product’s safety;
adequate and well-controlled human clinical trials to establish the product’s safety and efficacy for its intended
indications;
submission to the FDA of a PMA; and
FDA review of the PMA in order to determine, among other things, whether the product is safe and effective for its
intended uses.
The FDA has approved the platelet system for ex vivo preparation of pathogen-reduced apheresis platelet components in order to
reduce the risk of TTI, including sepsis, and as an alternative to gamma irradiation for prevention of transfusion-associated graft
versus host disease, or TA-GVHD. The FDA has also approved the plasma system for ex vivo preparation of pathogen-reduced, whole
blood derived or apheresis plasma in order to reduce the risk of TTI when treating patients requiring therapeutic plasma transfusion
and as an alternative to gamma irradiation for prevention of TA-GVHD. We plan to conduct development activities, clinical studies
and in vitro studies for our platelet system to expand our label claims to include, among others, storage of INTERCEPT-treated
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platelets for up to seven days rather than five days, and a new processing set for triple dose collections. In addition, we plan to perform
in vitro studies and seek a PMA supplement to INTERCEPT cryo and possibility other plasma derived biological products.
As a condition to the FDA approval of the platelet system, we are required to conduct two post-approval studies of the platelet system
studies - a haemovigilance study to evaluate the incidence of acute lung injury following transfusion of INTERCEPT-treated platelets;
and a recovery study of platelets treated with the platelet system. If we are unable to complete this study or the results of this study
reveal unacceptable safety risks, we could be required to perform additional studies, which may be costly, and even lose U.S.
marketing approval of the platelet and/or plasma systems. In addition to these studies, the FDA may also require us to commit to
perform other lengthy post-marketing studies, for which we would have to expend significant additional resources. In addition, there is
a risk that post-approval studies will show results inconsistent with our previous studies.
Any modifications to the platelet and plasma systems that could significantly affect their safety or effectiveness, including significant
design and manufacturing changes, or that would constitute a major change in their intended use, manufacture, design, components, or
technology requires FDA approval of a new PMA or PMA supplement. However, certain changes to a PMA-approved device do not
require submission and approval of a new PMA or PMA supplement and may only require notice to FDA in a PMA Annual Report.
The FDA requires every supplier to make this determination in the first instance, but the FDA may review any supplier’s decision.
The FDA may not agree with our decisions regarding whether new submissions or approvals are necessary. Our products could be
subject to recall if the FDA determines, for any reason, that our products are not safe or effective or that appropriate regulatory
submissions were not made. If new regulatory approvals are required, this could delay or preclude our ability to market the modified
system. For example, due to the obsolescence of certain parts, we have redesigned the illuminator used in the platelet and plasma
systems and may need to further redesign the illuminator. We will need to obtain regulatory approval of any future redesign of the
illuminator before it can be commercialized in the U.S. or under CE Mark. In addition, certain solvents we used to make the plastic
beads in the compound adsorption devices are no longer available. We will need to qualify plastic beads produced with a new solvent
prior to consuming existing inventory levels. Furthermore, in order to address the entire market in the U.S., we will need to develop
and test additional configurations of the platelet system, including making the platelet system compatible with platelets triple dose
collections and random donor platelets. Our failure to obtain FDA or foreign regulatory approvals of new platelet and plasma product
configurations or the new plastics could significantly limit product revenues from sales of the platelet and plasma systems.
With FDA approval of our platelet and plasma systems, we are required to continue to comply with applicable FDA and other
regulatory requirements related to, among other things, labeling, packaging, storage, advertising, promotion, record-keeping and
reporting of safety and other information. In addition, our manufacturers and their facilities are required to comply with extensive
FDA and foreign regulatory agency requirements, including, in the U.S., ensuring that quality control and manufacturing procedures
conform to FDA-mandated current Good Manufacturing Practice, or cGMP, and Quality System Regulation, or QSR, requirements.
As such, we and our contract manufacturers are subject to continual review and periodic inspections. We understand that the
manufacturing facility which produces our platelet and plasma systems will be audited by the FDA. We and our contract
manufacturers will need to satisfactorily resolve and comply with adverse findings of the audit, if any. Complying with and resolving
any audit findings may result in additional costs, changes to our manufacturers quality management systems or both. Failure to timely
resolve and comply to audit findings, if any, may result in enforcement actions and may result in a disruption to the supply of our
products. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory
compliance, including manufacturing, production and quality control.
We are also required to report certain adverse events and production problems, if any, to the FDA and foreign regulatory authorities,
when applicable, and FDA or other foreign regulatory authorities may require us to recall products as a result of adverse events or
production problems. Additionally, we are required to comply with requirements concerning advertising and promotion for our
products. For example, our promotional materials and training methods must comply with FDA and other applicable laws and
regulations, including the prohibition of the promotion of unapproved, or off-label, uses. If the FDA determines that our promotional
materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or
subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil
fine or criminal penalties. It is also possible that other federal, state or foreign authorities might take action if they consider our
promotional or training materials to constitute promotion of an off-label use, or a violation or any other federal or state law that
applies to us, such as laws prohibiting false claims for reimbursement. Any enforcement action brought by a federal, state or foreign
authority could result in significant civil, criminal and/or administrative penalties, damages, fines, disgorgement, exclusion from
participation in government programs, such as Medicare and Medicaid, injunctions, private “qui tam” actions brought by individual
whistleblowers in the name of the government, or refusal to allow us to enter into government contracts, contractual damages,
administrative burdens, diminished profits and future earnings, additional reporting requirements and/or oversight if we become
subject to a corporate integrity agreement or similar agreement. In addition, our reputation could be damaged and adoption of the
products could be impaired. Although our policy is to refrain from statements that could be considered off-label promotion of our
products, the FDA or another regulatory agency could disagree and conclude that we have engaged in off-label promotion. In addition,
the off-label use of our products may increase the risk of product liability claims.
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CBER is the center within the FDA principally responsible for regulating the INTERCEPT Blood System. In addition to regulating
our blood safety products, CBER also regulates the blood collection centers and would regulate any blood products that they prepare
using the INTERCEPT Blood System. Prior to broader customer adoption in the U.S., U.S.-based blood centers will need to complete
their process validations and obtain site-specific licenses from CBER before making INTERCEPT-treated blood products available to
their interstate hospital customers. Any significant product change that we make may require amendments or supplements to those
site-specific licenses that a U.S.-based blood center customer has obtained. Additionally, the hospital customers of any of our new
blood center customers will need to go through the administrative process of generating internal tracking codes to integrate
INTERCEPT-treated products into their inventories, which may result in further delay of customer adoption in the U.S. We plan to
continue working with U.S.-based blood centers to support these activities as any delay in obtaining these licenses would adversely
impact our ability to sell products in the U.S.
We believe that in deciding whether the INTERCEPT Blood System is safe and effective regulatory authorities have taken, and are
expected to take, into account whether it adversely affects the therapeutic efficacy of blood components as compared to the therapeutic
efficacy of blood components not treated with INTERCEPT. Data from human clinical studies must demonstrate the safety of treated
blood components and their therapeutic comparability to untreated blood components. In addition, regulatory authorities will weigh
INTERCEPT’s safety, including potential toxicities of the inactivation compounds, and other risks against the benefits of using the
system in a blood supply that has become safer. We have conducted many toxicology studies designed to demonstrate the
INTERCEPT Blood System’s safety. There can be no assurance that regulatory authorities will not require further toxicology or other
studies of our products. Based on discussions with the FDA and European regulatory authorities, we believe that data only from
laboratory and animal studies, not data from human clinical studies, will be required to demonstrate the system’s efficacy in reducing
pathogens. In light of these criteria, our clinical trial programs for the INTERCEPT Blood System consist of studies that differ from
typical Phase 1, Phase 2 and Phase 3 clinical studies.
The preclinical and clinical studies of the INTERCEPT Blood System for red blood cells have been conducted using prototype system
disposables and devices. In addition to the clinical trials, a number of manufacturing and validation activities must be completed
before we could sell the red blood cell product.
Further discussion of our regulatory and clinical trial status can be found in “Item 1A—Risk Factors” of this Annual Report on Form
10-K, under the risk factor titled: “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
country’s regulatory authorities to grant marketing approval, we will be unable to commercialize our products and generate product
revenue in that country. Our investigational red blood cell system requires extensive additional testing and development.”
U.S. Health Care Reimbursement and Reform
Our ability to commercialize our products successfully in the U.S. will depend in part on the extent to which coverage and appropriate
reimbursement levels for the cost of the products and related treatment are obtained. The INTERCEPT Blood System is currently sold
to U.S. based blood collection entities. Because our products are not directly reimbursable by governmental or commercial third-party
payors, adoption of the INTERCEPT Blood System will, in part, require coverage and adequate reimbursement to be provided for the
procedures and treatments which utilize INTERCEPT-processed blood products. There is no uniform policy of coverage and
reimbursement among third-party payors, as such, coverage and reimbursement can differ significantly from payor to payor. Even if
favorable coverage and reimbursement status is attained for a particular procedure or treatment, less favorable coverage policies and
reimbursement rates may be implemented in the future. If the costs to hospitals for INTERCEPT-processed blood products acquired
from blood collection entities cannot be easily, readily, or fully incorporated into the hospital’s existing coverage and reimbursement
structure, adoption of our products may be negatively affected.
In the U.S., there have been a number of legislative and regulatory changes to the healthcare system that could affect our future results
of operations. For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act, or collectively, the ACA, and ongoing cost saving efforts may have an impact on our ability to profitably
commercialize the INTERCEPT Blood System in the U.S. and elsewhere. The ACA and other health care reform in the U.S. include
provisions that place downward pressure on the pricing of medical products and also introduce new taxation on medical devices (the
effective date of which has been delayed), which could further impact our profit margins.
Since its enactment, there have been judicial and Congressional challenges to numerous provisions of the ACA. Since January 2017,
President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of
the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. Concurrently, Congress has
considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive
repeal legislation, it has enacted laws that modify certain provisions of the ACA such as removing penalties as of January 1, 2019 for
not complying with the ACA’s individual mandate to carry health insurance and delaying the implementation of certain ACA-
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mandated fees. On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because
the “individual mandate” was repealed by Congress as part of legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act
of 2017. Additionally, on December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the
individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining
provisions of the ACA are invalid as well. It is unclear how this decision, subsequent decisions, subsequent appeals, and other efforts
to repeal and replace the ACA will impact the ACA.
Further discussion of the impact of health care reform and laws governing our business practices on our business can be found in
“Item 1A—Risk Factors” of this Annual Report on Form 10-K, under the risk factors titled “Legislative, regulatory, or other
healthcare reforms may make it more difficult and costly for us to obtain regulatory approval of our products and to produce, market
and distribute our products after approval is obtained” and “We are subject to federal, state and foreign laws governing our business
practices which, if violated, could result in substantial penalties and harm our reputation and business.”
Employees
As of December 31, 2019, we had 254 employees, 100 of whom were engaged in research and development and 154 of whom were
engaged in selling, general and administrative activities. Of the 154 employees engaged in selling, general, and administrative
activities, 44 were employed by our European subsidiary, Cerus Europe B.V. None of our employees are covered by collective
bargaining agreements, and we believe that our relationship with our employees is good.
Available Information
We maintain a website at www.cerus.com; however, information found on our website is not incorporated by reference into this report.
We make available free of charge on or through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended, or Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish
it to, the Securities Exchange Commission.
Financial Information
Our financial information including our consolidated balance sheets, consolidated statements of operations, consolidated statements of
comprehensive loss, consolidated statements of stockholders’ equity, consolidated statements of cash flows, and the related footnotes
thereto, can be found under “Financial Statement Schedules” in Part IV of this Annual Report on Form 10-K.
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Item 1A. 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.
We depend substantially upon the commercial success of the INTERCEPT Blood System for platelets and plasma in the United
States, or U.S., and our inability to successfully commercialize the INTERCEPT Blood System in the U.S. would have a material
adverse effect on our business, financial condition, results of operations and growth prospects.
We have invested a significant portion of our efforts and financial resources on the development of the INTERCEPT Blood System
for platelets and plasma for the U.S. market. As a result, our business is substantially dependent on our ability to successfully
commercialize the INTERCEPT Blood System in the U.S. in a timely manner. In December 2014, we received U.S. regulatory
approval of the INTERCEPT Blood System for platelets and plasma, with certain restrictions regarding usage, and although the
INTERCEPT Blood System is now commercially available in the U.S., we have no prior experience commercializing any products in
the U.S. and we may be unable to commercialize the INTERCEPT Blood System in the U.S. successfully or in a timely manner, or at
all. The broad successful commercial adoption of any product, particularly involving novel technologies, is often dependent upon the
seller earning a level of trust from and familiarity with customers, which can take time to develop. In addition, although we received
the U.S. Food and Drug Administration, or FDA approval of our platelet and plasma systems in December 2014, our U.S. commercial
efforts in 2019 have been largely focused on enabling blood centers that are using INTERCEPT to optimize production and increase
the number of platelet and plasma units produced and made available to patients and continuing to develop awareness of
INTERCEPT’s product profile relative to other platelet and plasma products, including conventional, un-treated components. In
September 2019, the FDA issued a final guidance document, “Bacterial Risk Control Strategies for Blood Collection Establishments
and Transfusion Services to Enhance the Safety and Availability of Platelets for Transfusion.” The guidance document requires all
blood collection facilities to comply with the options available under the guidance document, which includes the INTERCEPT Blood
System, for all platelet collections, no later than eighteen months from the issuance date. Although the INTERCEPT Blood System is
one of the options available to U.S. blood centers for compliance, we cannot predict when, if ever, U.S. customers will adopt
INTERCEPT over other options or at what levels. Significant product revenue from customers in the U.S. may not occur timely, if at
all, until we have been able to successfully implement the platelet and plasma systems and demonstrate that they are economical, safe
and efficacious for potential customers. Similar to our experience in foreign jurisdictions, some potential customers in the U.S. have
chosen to first validate our technology or conduct other pre-adoption activities prior to purchasing or deciding whether to adopt the
INTERCEPT Blood System for commercial use, which may never occur. Further, the hospital customers of any of our new blood
center customers will need to go through the administrative process of generating internal tracking codes to integrate INTERCEPT-
treated products into their inventories, which may further delay customer adoption in the U.S. If we are not successful in achieving
market adoption of the INTERCEPT Blood System in the U.S., we may never generate substantial product revenue, and our business,
financial condition, results of operations and growth prospects would be materially and adversely affected.
Our ability to successfully commercialize the INTERCEPT Blood System for platelets and plasma in the U.S. will depend on our
ability to:
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achieve market acceptance and generate product sales through execution of sales agreements on commercially reasonable
terms;
enter into and maintain sufficient manufacturing arrangements for the U.S. market with our third-party suppliers;
create market demand for the INTERCEPT Blood System through our education, marketing and sales activities;
hire, train, deploy, support and maintain a qualified U.S.-based commercial organization and field sales force;
expand the labeled indications of use for the INTERCEPT Blood System and/or design, develop, test and obtain
regulatory approval for new product configurations;
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•
•
comply with requirements established by the FDA, including post-marketing requirements and label restrictions; and
comply with other U.S. healthcare regulatory requirements.
In addition to the other risks described herein, our ability to successfully commercialize the INTERCEPT Blood System for platelets
and plasma in the U.S. is subject to a number of risks and uncertainties, including those related to:
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the highly concentrated U.S. blood collection market that is dominated by a small number of blood collection
organizations;
availability of donors;
regulatory and licensing requirements, including the CBER licensing process that U.S.-based blood centers are required to
follow in order to obtain and maintain the required site-specific licenses to engage in interstate transport of blood
components processed using the INTERCEPT Blood System;
changed or increased regulatory restrictions or requirements;
the amount available for reimbursement pursuant to codes we have obtained under the Healthcare Common Procedure
Coding System, or HCPCS, and pricing for outpatient use of INTERCEPT-treated blood components;
any supply or manufacturing problems or delays arising with any of our suppliers, many of whom are our sole suppliers
for the particular product or component they manufacture, the ability of our suppliers to maintain FDA approval to
manufacture the INTERCEPT Blood System and to comply with FDA-mandated current Good Manufacturing Practice, or
cGMP, and Quality System Regulation, or QSR, requirements;
dependency upon any third-party manufacturer that supplies products required by blood centers to process and store blood
components consistent with our approved specifications and claims, including but not limited to, apheresis collection
devices, disposable blood bags and reagents, and platelet additive solution, or PAS;
changes in healthcare laws and policy, including changes in requirements for blood product coverage by U.S. federal
healthcare programs; and
acceptance of the INTERCEPT Blood System as safe, effective and economical from the broad constituencies involved in
the healthcare system.
In addition to the above, our ability to successfully commercialize the INTERCEPT Blood System in the U.S. is dependent on our
ability to operate without infringing on the intellectual property rights of others. For example, we are aware of an expired U.S. patent
that had been held by a third-party that covered methods to remove psoralen compounds from blood products. We have reviewed the
patent and believe there exist substantial questions concerning its validity. We cannot be certain, however, that a court would hold the
patent not infringed by our platelet or plasma systems. In this regard, whether or not we have infringed this patent will not be known
with certainty unless and until a court interprets the patent in the context of litigation. In the event that we are found to have infringed
any valid claim of this patent, we may, among other things, be required to pay damages.
These and the other risks described below related to the commercialization of the INTERCEPT Blood System could have a material
adverse effect on our ability to successfully commercialize the INTERCEPT Blood System for platelets and plasma in the U.S.
The INTERCEPT Blood System may not achieve broad market adoption.
In order to increase market adoption of the INTERCEPT Blood System and to increase market demand, we must address issues and
concerns from broad constituencies involved in the healthcare system, from blood centers to patients, transfusing physicians, key
opinion leaders, 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 and outweigh their risks.
The use of the platelet system results in some processing loss of platelets. If the loss of platelets leads to increased costs, or the
perception of increased costs for our customers, or if the use of our product in any way constrains the availability of blood due to
platelet loss, or our customers or prospective customers believe that the loss of platelets reduces the efficacy of the transfusable unit,
or our process requires changes in blood center or clinical regimens, prospective customers may not adopt our platelet system.
Additionally existing customers may not believe they can justify any perceived operational change or inefficiency by itself or in
conjunction with a blood component availability shortage. Certain customers that attempt to optimize collection practices from
individual donors in order to increase the volume of transfusable units that can be treated with INTERCEPT from those collections
may experience a less optimized yield as a result of adopting INTERCEPT as compared to collecting conventional platelet products.
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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. Although certain other studies demonstrate that INTERCEPT-treated platelets retain therapeutic function comparable to
conventional platelets, prospective customers may choose not to adopt our platelet system due to considerations relating to corrected
count increment, efficacy or other factors.
The INTERCEPT Blood System does not inactivate all known pathogens, and the inability of the INTERCEPT Blood System to
inactivate certain pathogens may limit its market adoption. For example, our products have not been demonstrated to be effective in
the reduction of certain non-lipid-enveloped viruses, including hepatitis A and E viruses, due to these viruses’ biology. In addition, our
products have not demonstrated a high level of reduction for human parvovirus B-19, which is also a non-lipid-enveloped virus.
Although we have shown high levels of reduction of a broad spectrum of lipid-enveloped viruses, prospective customers may choose
not to adopt our products based on considerations concerning inability to inactivate, or limited reduction, of certain non-lipid-
enveloped viruses. Similarly, although our products have been demonstrated to effectively inactivate spore-forming bacteria, our
products have not been shown to be effective in reducing bacterial spores once formed. In addition, our products do not inactivate
prions since prions do not contain nucleic acid. 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 adoption of our
products. 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. Should INTERCEPT-treated
components contain detectable levels of pathogens after treatment, the efficacy of INTERCEPT may be called into question, whether
or not any remaining pathogens are the result of INTERCEPT’s efficacy or other factors. Such uncertainties may limit the market
adoption of our products.
We have conducted studies of our products in both in vitro and in vivo 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. In addition, strains of infectious agents in living donors may be different from those strains
commercially available or for which we have tested and for which we have received approval of the inactivation claims for our
products. To the extent that actual results in human patients differ, commercially available or tested strains prove to be different, or
customers or potential customers perceive that actual results differ from the results of our in vitro or in vivo testing, market acceptance
of our products may be negatively impacted.
If customers experience operational or technical problems with the use of INTERCEPT Blood System products, market acceptance
may be reduced or delayed. For example, if adverse events arise from incomplete reduction of pathogens, improper processing or user
error, or if testing of INTERCEPT-treated blood samples fails to reliably confirm pathogen reduction, whether or not directly
attributable to the INTERCEPT Blood System, customers may refrain from purchasing our products. Furthermore, should customers
communicate operational problems or suspected product failure, we will need to investigate and report imputability to the relevant
regulatory authorities in a timely manner. We or others may be required to file reports on such complaints or product failure before we
have the ability to obtain conclusive data as to imputability which may cause concern with existing and prospective customers or
regulators. In addition, the U.S. is currently experiencing a shortage of platelet components in many markets. Should customers feel
that INTERCEPT treatment has a negative impact on the number of transfusable platelet units able to be manufactured from available
donors, our ability to convince a blood center to treat increasing proportions of its platelet units may be negatively impacted.
Moreover, there is a risk that further studies that we or others may conduct, including the post-approval studies we are required to
conduct as a condition to the FDA approval of the platelet system, 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. In
addition, some hospitals may decide to purchase and transfuse both INTERCEPT-treated blood components and conventional blood
components. Managing such a dual inventory of blood products may be challenging, and hospitals may need to amend their product
labels and inventory management systems before being able to move forward with INTERCEPT. This may require coordination
between hospital suppliers and blood centers, which in turn may cause delay in market adoption. Further, in certain markets, potential
customers may require us to develop, sell, and support data management application software for their operations before they would
consider adopting INTERCEPT. Such software development efforts may be costly or we may be unsuccessful in developing a data
management application that would be broadly accepted. Developing, maintaining and supporting software can be time consuming,
costly and may require resources and skill sets that we do not possess. Failure to do so may limit market adoption in geographies
where we commercialize the INTERCEPT Blood System, including the U.S. In addition, customers may require certain changes to
our products for any number of reasons. Complying with such requests may prove costly, and may create complexities surrounding
the manufacturing of the kits, compliance with regulatory authorities, blood center usage, or inventory management. Conversely,
failure to comply with such requests from customers may result in damage to our relationship or the potential loss of customer
business.
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Market adoption of our products is affected by blood center and healthcare facility budgets and the availability of reimbursement from
governments, managed care payors, such as insurance companies, and/or other third parties. In many jurisdictions, due to the structure
of the blood products industry, we have little control over budget and reimbursement discussions, which generally occur between
blood centers, healthcare facilities such as hospitals, and national or regional ministries of health and private payors. Even if a
particular blood center is prepared to adopt the INTERCEPT Blood System, its 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 some pathogens prior to transfusion, even after implementing our products, some blood centers may not be
able to identify enough cost offsets or hospital pricing increases to afford to purchase our products. Budgetary concerns may be further
exacerbated by economic legislation in certain countries and by proposals by legislators at both the federal and, in some cases, state
levels, regulators, healthcare facilities and third-party payors to keep healthcare costs down, which may limit the adoption of new
technologies, including our products. In some jurisdictions, commercial use of our products may not be covered by governmental or
commercial third-party payors for health care services and may never be covered. Even if we received national reimbursement for our
products, we may not be able to convince blood center customers to change their operating practices and produce INTERCEPT-
treated platelets and plasma. In the U.S., we obtained HCPCS reimbursement codes for INTERCEPT-treated platelets and plasma in
the outpatient setting in 2015. The costs and expenses incurred by the blood center related to donor blood are typically included in the
price that the blood center charges a hospital for a unit of blood. Even after blood components treated with our products are approved
for reimbursement by governmental or commercial third-party payors, including under HCPCS codes, the costs and expenses related
to use of the INTERCEPT Blood System will not be directly reimbursed, but instead may be incorporated within the reimbursement
structure for medical procedures and/or products at the site of patient care. Governmental or third-party payors may change
reimbursement rates, year over year, or in reaction to submitted claims for reimbursement of costs and expenses related to blood
components treated with INTERCEPT. If the costs to the hospital for INTERCEPT processed blood products cannot be easily, readily,
or fully incorporated into the existing reimbursement structure, or if reimbursement rates are decreased in any given year for blood
components treated with INTERCEPT, hospital billing and/or reimbursement for these products could be impacted, thus negatively
impacting hospitals’ acceptance and uptake of our products.
The market for the INTERCEPT Blood System is highly concentrated with few customers, including often-dominant regional or
national blood collection entities. Even where our products receive regulatory approval and reimbursement is available, failure to
effectively market, promote, distribute, price or sell our products to any of these customers could significantly delay or even diminish
potential product revenue in those geographies. Moreover, the market for pathogen reduction systems in the U.S. is highly
concentrated and dominated by a small number of blood collection organizations. In the U.S., the American Red Cross represents the
largest single portion of the blood collection market. We cannot guarantee the long-term volume or timing of commercial purchases
that the American Red Cross may make, if any, under our agreement. Our ability to gain significant market penetration in the U.S. is
largely dependent on utilization of INTERCEPT and distribution of INTERCEPT-treated blood components by the American Red
Cross. The American Red Cross is a large organization and broad-based utilization of INTERCEPT and distribution of INTERCEPT-
treated products may be concentrated in a limited number of centers or may occur slowly, if at all. Conversely, given the large relative
size of the American Red Cross, should they deploy the technology rapidly, our resources may be inadequate to fulfill the American
Red Cross’ and other customers’ demands, which could result in a loss of product revenues or customer contracts, or both. In
September 2019, the FDA issued a final guidance document, “Bacterial Risk Control Strategies for Blood Collection Establishments
and Transfusion Services to Enhance the Safety and Availability of Platelets for Transfusion.” The guidance document requires all
blood collection facilities to comply with the options available under the guidance document, which includes the INTERCEPT blood
system, for all platelet collections, no later than eighteen months from the issuance date. Blood centers may wait until later in the
compliance grace period before beginning to take steps to implement INTERCEPT. Should a large number of blood centers wait, we
may not have sufficient resources or product available to allow customers to timely and successfully implement INTERCEPT before
the end of the compliance grace period. Should we be unable to manufacture INTERCEPT in sufficient quantities in a timely manner,
or have adequate resources to assist customer with implementing the INTERCEPT blood system, U.S. blood centers may be forced to
use alternate options allowed by the guidance document, which could permanently impact our ability to convert those blood centers to
INTERCEPT users. 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 are made 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. Obtaining these approvals requires support and coordination from local blood centers, and may take a
significant period of time to obtain, if ever. Product specifications that receive marketing authorization from the PEI may differ from
product specifications that have been adopted in other territories where we rely on CE Mark approval, thereby necessitating market
specific modifications to the commercial product, which may not be economical or technically feasible for us. Following the inclusion
of pathogen-inactivated platelets for national reimbursement by the German Institute for the Hospital Remuneration System as of
January 1, 2018, German customers who do not currently have an approved marketing authorization application, or MAA, will first
need to obtain one before using our product. The review period for a new MAA can be up to twelve months or longer following
submission and we cannot assure that any of the potential German customers submitting a new MAA will obtain it. Without broad
approvals of MAA applications obtained by potential German customers, our ability to successfully commercialize INTERCEPT in
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Germany will be negatively impacted, which may adversely affect our results of operations and financial results. In addition, the
reimbursement awarded to INTERCEPT in Germany may not be considered by German blood centers as attractive enough to
implement pathogen reduction or cover the entirety of their blood center platelet collections which may in turn limit the market
acceptance in Germany. Similar to the U.S., German blood centers will need to successfully market and sell to their hospital customers
and understand and assist with the steps that are needed at the hospital level in Germany to administer pathogen-reduced platelets.
Should German blood centers not adequately market and sell or assist their hospital customers or if hospitals object, or are slow
implementing the steps needed to procure and administer pathogen reduced platelets, our market in Germany many be limited or be
slow to realize acceptance.
In July 2017, we entered into new agreements with EFS to supply illuminators and platelet and plasma disposable kits. The agreement
for supply of illuminators and platelet disposable kits provided for a base term of two years, with two options for EFS to extend for
one year each, the first of which, EFS exercised in 2019. In January 2020, we entered into a new agreement with EFS to supply
plasma disposable kits and maintenance services for illuminators for a base term of two years, with two options for EFS to extend for
one year each. While EFS has standardized production of its platelets using the INTERCEPT Blood System, we cannot provide any
assurance that the national deployment of INTERCEPT to treat platelets in France will be sustainable or that we will be able to secure
any subsequent contracts with EFS or that the terms, including the pricing or committed volumes, if any, of any future contract will be
equivalent or superior to the terms under our current contract. If we are unable to continue to successfully support EFS’ national
adoption of the INTERCEPT Blood System for platelets, EFS’ use of the INTERCEPT Blood System for Plasma or the final
commercial terms of any subsequent contract for platelet or plasma disposable kits are less favorable than the terms under our existing
contracts, our financial results may be adversely impacted. Our contracts with EFS do not contain purchase volume commitments and
as such, we may see variability in purchase levels or an altogether cessation. While EFS has exercised the first one-year extension
option under the supply agreement for illuminators and platelet disposable kits, we cannot assure that EFS will exercise its remaining
option under such agreement or under the supply agreement for plasma disposable kits, enter into a new longer-term agreement, or
that EFS continue to use the INTERCEPT Blood System at historical levels or at all.
In addition, we understand that EFS is inspecting and testing samples of each lot that they purchase from us prior to accepting the
products shipped to fulfill orders. We have little insight into the time to test, testing conditions or ultimate results. Other customers
may require similar conditions of purchase. Testing may have a negative impact on our ability to recognize product revenue either due
to the time it takes to test and approve the release of a shipment or if the customer experiences problems with testing or if testing
results are outside of the customer acceptance criteria.
In Japan, the Japanese Red Cross controls a significant majority of blood transfusions 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 reduction of blood over a number of years and has yet to make a formal determination to adopt any pathogen reduction
approach. We also understand that the Japanese Red Cross has begun formal evaluation of a competing technology. Before the
Japanese Red Cross considers our products, we understand that we may need to commit to making certain product configuration
changes, which are currently under development but may not be economically or technologically feasible for us to accomplish.
Significant increases in demand may occur given the concentrated nature of many of the largest potential customers and the potential
for a mandate by public health agencies to adopt pathogen reduction technologies. Should those customers choose to adopt and
standardize their production on the INTERCEPT Blood System or be required to adopt and standardize on the INTERCEPT Blood
System, our ability to meet associated increases in demand may be constrained due to a variety of factors, including supply issues,
manufacturing disruptions, availability of disposable kits manufactured from the obsolete plastic materials in jurisdictions that have
not approved the use of alternate plastics for our disposable kits, or other obsolescence of parts, among others. If we encounter such
disruptions or supply shortages, we may have to allocate available products to customers, which could negatively impact our business
and reputation or cause those customers to look for alternatives to the INTERCEPT Blood System.
We expect to continue to generate losses.
We may never achieve a profitable level of operations. Our cost of product sold, research and development and selling, general and
administrative expenses have resulted in substantial losses since our inception. The platelet and plasma systems have been approved in
the U.S. only since December 2014 and are not approved in many countries around the world. Similarly, our extended-storage
cryoprecipitate PMA supplement is not yet approved in the U.S. or anywhere else in the world. The red blood cell system is in the
development stage and may never emerge from the 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,
or to compete favorably with other blood safety interventions or other pathogen reduction technologies, which may reduce or
altogether eliminate any gross profit on sales. At our present and expected 2020 sales levels of the platelet and plasma systems, our
costs to manufacture, distribute, market, sell, support the systems and develop new products are and are expected to continue to be in
excess of our product revenue. We expect our losses to continue at least until we are able to gain widespread commercial adoption,
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which may never occur. We expect to invest in research and development costs as we pursue a PMA supplement for extended-storage
cryoprecipitate and hire employees and possibly retain contract resources to build a specialized commercial effort to sell that product
directly to hospitals. Even if we were to receive approval for a PMA supplement for extended-storage cryoprecipitate, we may not
receive approval of label claims for all indications or for indications with the highest unmet need or for optimal market acceptance.
We expect to incur additional research and development costs associated with the development of different configurations of existing
product candidates and products including extended-storage cryoprecipitate and our illuminator, development of new products,
planning, enrolling and completing ongoing clinical and non-clinical studies, including the post-approval studies we are required to
conduct in connection with the FDA approval of the platelet system, pursuing potential regulatory approvals in other geographies
where we do not currently sell our platelet and plasma systems, planning and conducting in vitro studies and clinical development of
our red blood cell system in Europe and the U.S., and completing activities to support a potential CE Mark approval for our red blood
cell system in Europe. These costs could be substantial and could extend the period during which we expect to operate at a loss,
particularly if we experience any difficulties or delays in completing the activities.
In certain countries, governments have issued regulations relating to the pricing and profitability of medical products and medical
product companies. Healthcare reform in the U.S. has also placed downward pressure on the pricing of medical products that could
have a negative impact on our profit margins.
Adverse market and economic conditions may exacerbate certain risks affecting our business.
Sales of our products are dependent on purchasing decisions of and/or reimbursement from government health administration
authorities, distribution partners and other organizations. As a result of adverse conditions affecting the global economy and credit and
financial markets, disruptions due to political instability or terrorist attacks, economies and currencies largely affected by declining
commodity prices or otherwise, these organizations may defer purchases, may be unable to satisfy their purchasing or reimbursement
obligations, or may delay payment for the INTERCEPT Blood System.
The sales of our products in Europe and the Commonwealth of Independent States, or CIS countries are denominated in Euros and
other non-U.S. currencies. As a result, we are exposed to foreign exchange risk, and our results of operations have been and will
continue to be impacted by fluctuations in the exchange rate between the U.S. dollar and other currencies, in particular the Euro. In
addition, there have been concerns for the overall stability and suitability of the Euro as a single currency given the economic and
political challenges facing individual Eurozone countries. Continuing deterioration in the creditworthiness of Eurozone countries, the
withdrawal of, or the announcement of the withdrawal of, one or more member countries from the European Union, or E.U., following
the United Kingdom’s, or U.K.’s, referendum in which voters approved an exit from the E.U., or the failure of the Euro as a common
European currency or an otherwise diminished value of the Euro could materially and adversely affect our product revenue.
In the past, a meaningful amount of our product revenue has come from sales to our distributor in Russia and other CIS countries.
Weakness and/or instability in worldwide oil prices and the ongoing civil, political and economic disturbances in Russia, Turkey and
Ukraine, and their spillover effect on surrounding areas, along with the impact of sanctions imposed against Russia by certain
European nations and the U.S., may significantly devalue the Russian Ruble and other CIS currencies and have had and may continue
to have a negative impact on the Russian and other CIS countries’ economies, particularly if sanctions continue to be levied against
Russia or are strengthened from those currently in place from either the E.U., U.S. or both. For example, in 2017 and again in 2018,
the Trump administration imposed sanctions against Russia, including sanctions targeting certain Russian individuals and entities. It is
possible that Congress will consider or pass legislation imposing additional sanctions. While our agreement with our Russian and
other CIS distributors calls for sales, invoicing and collections to be denominated in Euros, if significant sanctions continue or are
strengthened, if new sanctions are imposed, the Russian economy and value of the Ruble or other CIS currencies may weaken, and our
business in Russia and other CIS countries may be negatively impacted further or never recover to historical levels. Similarly, weak or
unstable worldwide oil prices and current political conflicts may negatively impact potential future sales of our products in the Middle
East and other oil producing exporters.
Moreover, the Trump administration has recently imposed tariffs on certain U.S. imports, and Canada, the E.U., China and other
countries have responded with retaliatory tariffs on certain U.S. exports. We cannot predict what effects these and potential additional
tariffs will have on our business, including in the context of escalating trade tensions. However, these tariffs and other trade
restrictions could increase our operating costs, reduce our gross margins or otherwise negatively impact our financial results.
In addition, terrorist attacks and civil unrests in some of the countries where we do business, and the resulting need for enhanced
security measures may impact our ability to deliver services, threaten the safety of our employees, and increase our costs of
operations.
Our products, blood products treated with the INTERCEPT Blood System and we are subject to extensive regulation by domestic
and foreign authorities. We will have to refile and obtain CE Mark approval under the MDR for all of our products and product
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candidates. If our preclinical and clinical data are not considered sufficient by a country’s regulatory authorities to grant
marketing approval, we will be unable to commercialize our products and generate product revenue in that country. Our
investigational 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 U.S. and by foreign regulatory bodies. These regulations are wide-ranging and govern,
among other things:
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development;
testing;
manufacturing;
labeling;
storage;
clinical trials;
product safety;
pre-market clearance or approval;
sales and distribution;
use standards and documentation;
conformity assessment procedures;
product traceability and record keeping procedures;
post-launch surveillance and post-approval studies;
quality;
advertising and promotion;
product import and export; and
reimbursement.
Our products must satisfy rigorous standards of safety and efficacy and we must adhere to quality standards regarding manufacturing
and customer-facing business processes in order for the FDA and international regulatory authorities to 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 required regulatory approvals is expensive, 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. In addition, our labeling claims may not be consistent across
markets. We have developed our products with the aim to standardize the volume of platelets treatable by our system, wherever
possible, which may not be accepted by all regulators or customers, may require additional data to support approval or may not
produce optimal transfusable blood components. For example, jurisdictions differ in the definition of what constitutes a transfusable
unit of platelets and in certain jurisdictions, our approved label claims and the definition of a viable platelet unit for transfusion may
allow for a significantly lower or higher platelet count per volume than certain jurisdictions may allow. This variability in platelet
count per volume may result in differences in platelet quality once processed and stored using INTERCEPT, and if customers
experience sub-optimal platelet quality following INTERCEPT treatment, they may limit their adoption of INTERCEPT or consider
adoption of competing blood safety technologies over INTERCEPT. In addition, our approved labels from the FDA limit our current
approvals to certain platelet collection platforms and a particular storage solution for the particular collection platform. For instance,
our FDA approved claims permit apheresis collection of platelets on the Fresenius Amicus device while stored in an additive solution
or for apheresis collection of platelets collected on the Terumo Trima device and stored in 100% plasma. While we and the
manufacturers are generating data to support expansion of the approved claims for INTERCEPT-treated platelets collected on and
used with additional storage solutions, we cannot assure you that the data generated will be acceptable to the FDA. Such discrepant
collection methodologies and storage solutions and conditions also exist for red blood cells. We may be required to provide the FDA
with data for each permutation for which blood banking treatment practices exist which may be time consuming, costly and limit the
potential size of the U.S. market that can use our products. In addition, in order to generate data that would be satisfactory to the FDA,
we need to test our products with different blood center production configurations producing otherwise saleable products for the blood
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center. As such, we will generally need to purchase blood components which are expensive and may be limited during periods of low
availability. For example, we continue to experience such availability constraints for platelets. Any such inability to procure blood
components at a reasonable price, or at all, to conduct studies in order to generate data sufficient for label claim expansions may
negatively impact our business opportunities.
Clinical and Preclinical
Clinical trials are particularly expensive and have a high risk of failure. Any of our trials may fail 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 or complete
clinical trials on schedule, if at all. 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, ministry of health or ethics committee approval to conduct a study at a prospective
clinical site, delays in recruiting subjects to participate in a study, delays in the conduct of the clinical trial by personnel at the clinical
site or due to our inability to actively and timely monitor clinical trial sites because of extreme weather or other natural forces, terrorist
activity or general concerns over employee safety. We have in the past restricted and may again in the future need to restrict travel to
certain clinical trial sites for monitoring site visits or to otherwise manage the trial due to such factors. Significant delays in clinical
testing could also materially impact our clinical trials. For example, some clinical sites for the RedeS study are located in areas subject
to disruption by severe weather such as flooding, hurricanes or other natural forces such as earthquakes, which have delayed
enrollment and progress of the RedeS study in the past. We cannot be certain that delays in the RedeS study or other clinical trials will
not occur. Criteria for regulatory approval in blood safety indications are evolving, reflecting competitive advances in the standard of
care against which new product candidates are judged, as well as 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. As a result, we do not know whether any clinical trial will result in marketable products. Typically, there is a high rate of
failure for product candidates in preclinical studies 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, further delaying the clinical trial process. 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. In addition, enrollment criteria
impacted the speed with which we were able to enroll patients in our European Phase 3 red blood cell system trial in chronic anemia
patients, ReCePI trial, and may impact other studies. Consequently, we may be unable to recruit suitable patients into clinical trials on
a timely basis, if at all, which may lead to higher costs or the inability to complete the clinical trials. 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.
We have conducted many toxicology studies to demonstrate the safety of the platelet and plasma systems, and we have conducted and
plan to conduct toxicology studies for the 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 or preclude regulatory approval and 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. Regulatory agencies weigh the potential risks of using our pathogen reduction products against the incremental benefits,
which may be difficult or impossible to quantify.
If any additional product candidates receive approval for commercial sale in the U.S., or if we obtain approval for expanded label
claims for the platelet system or plasma system, the FDA may require one or more post-approval clinical or in vitro studies as a
condition of approval, such as the post-approval clinical study we are conducting in connection with the approval of the platelet
system and the additional post-approval study that we are required to conduct on recovery and survival of platelets suspended in 100%
plasma in connection with the expanded label claim that we received for the platelet system. Each of these studies and any additional
studies that the FDA may require could involve significant expense and may require us to secure adequate funding to complete. In
addition, enrollment of post-marketing studies may be difficult to complete timely if customers of blood centers are reluctant to accept
conventional, non-INTERCEPT-treated products once INTERCEPT products become available to them. Other regulatory authorities
outside of the U.S. may also require post-marketing studies. 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 adoption, implementation or impact of adverse
governmental regulation that might arise from future legislative or administrative action. In September 2019, the FDA issued a final
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guidance document, “Bacterial Risk Control Strategies for Blood Collection Establishments and Transfusion Services to Enhance the
Safety and Availability of Platelets for Transfusion,” requiring all blood collection facilities to comply with the options available
under the guidance document for all platelet collections. Our INTERCEPT Blood System for platelets is an approved option for blood
centers to meet the guidance document requirements. However, we do not yet have approved label claims for all platelet processing
standards. Our inability to meet such operational or processing constraints may impair our potential results permanently or until we are
able to obtain such claims, or customers may be forced to choose alternative options to comply with the guidance document by the end
of the eighteen month compliance grace period, March 31, 2021. Should that occur, we may be unable to subsequently convert blood
centers to INTERCEPT Blood System for platelets which would limit our market potential.
Outside the U.S., regulations vary by country, including the requirements for regulatory and marketing approvals or clearance, the
time required for regulatory review and the sanctions imposed for violations. In addition to CE Mark documentation, countries outside
the E.U. may require clinical data submissions, registration packages, import licenses or other documentation. Regulatory authorities
in Japan, China, Taiwan, South Korea, Vietnam, Thailand, Singapore and elsewhere may require in-country clinical trial data, among
other requirements, or that our products be widely adopted commercially in Europe and the U.S., or may delay such approval
decisions until our products are more widely adopted. 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 U.S., Germany, Canada, Austria, Australia and
other countries, applicable to prospective customers of INTERCEPT Blood System products and 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 before making available blood products processed with our pathogen
reduction systems to hospitals and transfusing physicians. Our customers may lack the resources or capability to obtain such
regulatory approvals. In Germany, blood centers need to obtain marketing authorizations before they can submit for reimbursement or
sell to hospitals. Significant product changes or changes in the way customers use our products may require amendments or
supplemental approvals to licenses already obtained. Blood centers that do submit applications, supplements or amendments for
manufacturing and sale may face disapproval or delays in approval that could 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.
Red Blood Cell System
While we submitted for CE Mark approval of our red blood cell system, it has not been approved or commercialized anywhere in the
world. Significant development and financial resources will be required to progress the red blood cell system into a commercially
viable product and to obtain the necessary regulatory approvals for the product. Final development of the red blood cell system may
never occur and failure can occur any time during the process. Any failure or delay in completing the development activities for the
red blood cell system would prevent or delay its commercialization, which could materially and adversely affect our business,
financial condition, results of operations, growth prospects and potential future market adoption of any of our products, including the
red blood cell system. Many of the factors described above that can contribute to the failure or delay of a clinical trial could impact the
trials we conduct for our red blood cell system. Even if we are successful in earlier clinical trials, the results of those early trials may
not be predictive of results obtained in later and larger clinical trials of the red blood cell system or the results of routine use if we are
able to commercialize the red blood cell system. In those cases, the FDA or foreign regulatory agencies may require us to conduct
additional clinical trials or further studies or analysis which may be costly and time-consuming. Furthermore, regulators may require
clinical data for our red blood cell system under each collection and processing method using various additive or storage solutions
before they would grant approval for any such configuration. The clinical data we have generated thus far and submitted for CE Mark
approval does not support multiple configurations of collection processes, storage solutions and kits. If we are required to and are
ultimately unable to collect data under each configuration or if we limit our pursuit of certain configurations over others, our market
opportunity may be limited. In some instances, we are relying on contract research organizations and other third parties to assist us in
designing, managing, monitoring and otherwise carrying out our clinical trials and development activities for the red blood cell
system. We do not control these third parties and, as a result, they may not treat our activities as their highest priority, or in the manner
in which we would prefer, which could result in delays, inefficient use of our resources and could distract personnel from other
activities. Additionally, if we, our contract research organizations, other third parties assisting us or our study sites fail to comply with
applicable good clinical practices, the clinical data generated in our trials may be deemed unreliable and the FDA or foreign regulatory
agencies may require us to perform additional clinical trials before approving the red blood cell system for commercialization. We
cannot assure you that, upon inspection, regulatory agencies will determine that any of our clinical trials comply with good clinical
practices. In addition, our clinical trials must be conducted with product produced under the FDA’s cGMP regulations and similar
regulations outside of the U.S. Our failure or the failure of our product manufacturers to comply with these regulations may require us
to repeat or redesign clinical trials, which would delay the regulatory approval process. For example, we understand that a source
chemical produced by a supplier to our contract manufacturer which uses the source chemical to produce a reagent for our red blood
cell system, potentially experienced discrepancies in its quality management system. If these discrepancies cannot be mitigated by
other means, it could negatively impact the usability of data generated in our clinical and in vitro studies which used that reagent or
limit our ability to timely complete ongoing clinical trials. We must be able to demonstrate stability of our active compounds
manufactured under cGMP which meets release specifications. We have not been able to demonstrate that our product manufacturers
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or we are able to meet those requirements. If we are unable to demonstrate an ability to manufacture according to our specifications
under cGMP with acceptable stability data, we may be unable to satisfy regulatory questions and requirements which could prevent or
delay the potential approval of or our ability to commercialize the red blood cell system. In addition, existing lots of these red blood
cell compounds manufactured under cGMP may be dispositioned by regulators or ourselves as unsuitable for either commercial or
clinical use which would impact our ability to produce INTERCEPT-treated red blood cells for ongoing and future clinical trials and
may require changes to the manufacturing process of our red blood cell compounds or new production of the compounds, all of which
would be costly and time consuming and impact our ability to perform under our contract with the Biomedical Advanced Research
and Development Authority, or BARDA. Following bankruptcy of one of our suppliers, we do not currently have a qualified
manufacturer to produce a key reagent compound for our red blood cell system beyond our existing inventory levels, which are in
insufficient quantity to complete our clinical trials or launch a product commercially. While we are in the process of identifying and
qualifying manufactures of our red blood cell reagent, qualification of any alternate supplier will be time consuming and may cause
delay in obtaining regulatory approval or commercialization and will cause us to incur additional cost. Unless we are able to obtain the
release of our previously manufactured reagent under the cGMP requirements and qualify a new manufacturer prior to existing
inventory levels expiring or running out with the FDA’s approval, we will have delays in completing our clinical trials or delays in
supplying product for commercial use. Further, we are currently in the process of negotiating a commercial supply agreement with the
manufacturer of the processing kits used in the red blood cell clinical trials. If we are unable to reach agreement on terms, our ability
to complete the RedeS and ReCePI studies and any future Phase 3 clinical trials may be adversely impacted. There can be no
guarantee that we will reach agreement or that, if an agreement is reached, that it will be on terms favorable to us. We also understand
that stricter regulations are being considered for certain raw materials used in our red blood cell processing sets. Should such
regulations be enacted we may need to qualify alternate plastics which comply with the stricter regulations which may be costly and
time consuming.
In 2003, we terminated Phase 3 clinical trials evaluating a prior generation of the red blood cell system in acute and chronic anemia
patients. The trials were terminated due to the detection of antibody reactivity to INTERCEPT-treated red blood cells in two patients
in the 2003 chronic anemia trial. Although the antibody reactivity was not associated with any adverse events, we developed process
changes designed to diminish the likelihood of antibody reactivity in red blood cells treated with our modified process. In a
subsequent Phase 1 clinical trial that we initiated in the fourth quarter of 2008 to evaluate recovery and survival of treated red blood
cells with the modified process, there were no adverse events reported. Based on the results from that trial, we obtained approval for
and commenced two Phase 3 clinical trials in Europe using the modified process in patients with acute and chronic anemia,
respectively. We successfully completed the European Phase 3 acute anemia clinical trial and the European Phase 3 chronic anemia
clinical trial, with the INTERCEPT Blood System for red blood cells meeting its primary efficacy and safety endpoints in both trials.
However, we cannot assure you that the adverse events observed in the terminated 2003 Phase 3 clinical trials of our earlier red blood
cell system will not be observed in the future. In addition, although our completed European Phase 3 clinical trials in acute anemia
patients and chronic anemia patients using our modified process met their primary endpoints, we cannot assure you that the same or
similar results will be observed in current and potential future clinical trials using our modified process. We cannot assure that patients
receiving INTERCEPT-treated red blood cells will not develop allergic reactions to the transfusion.
We will need to successfully conduct and complete license enabling Phase 3 clinical trials in the U.S. and to define a pathway toward
generating sufficient chronic anemia data with the FDA for licensure. We are currently enrolling in two Phase 3 clinical trials in the
U.S. However, enrollment in clinical trials can be difficult. For instance our ReCePI study in complex cardiovascular surgery patients
has been slower to enroll due to a variety of factors including low frequency of administering red blood cells to the patient population.
If we are unable to enroll a sufficient number of patients from the ReCePI study to generate the data needed for licensure, we will
need to reach agreement with the FDA on a new pathway to generate sufficient data, including the potential for additional Phase 3
clinical trials beyond what is currently contemplated with the RedeS and ReCePI studies and in chronic anemia patients. Given the
need to phenotypically match donations and patients and the existing burden of managing the production and supply to sickle-cell
anemia patients, donor recruitment in a potential additional Phase 3 clinical trial in chronic anemia patients may be difficult or
impractical, which could significantly delay or preclude our ability to obtain any FDA approval of our red blood cell system. In any
event, there can be no assurance that we will be able to successfully complete these perquisite Phase 3 clinical trials or otherwise
generate sufficient Phase 3 clinical data, nor can there be any assurance that we and the FDA will agree to any trial protocol we
propose or that we will otherwise obtain FDA clearance to initiate an additional Phase 3 clinical trial. In part, we will seek to introduce
supplemental clinical data we obtained from European clinical trials, though we cannot assure you that we will be able to demonstrate
comparability or that the FDA will allow supplemental clinical European data. The FDA has recently agreed to modify the criteria for
a clinical pause in the RedeS study if we see three or more treatment emergent antibodies with amustaline specificity without evidence
of hemolysis in patients receiving INTERCEPT-treated red blood cells in that study. We will now be allowed to continue study
enrollment for the RedeS study while we investigate the clinical significance of the antibodies. If we determine that there is no clinical
significance and no impact on patients, then there will be no impact on study enrollment. If treatment emergent antibody reactions
associated with hemolysis are observed in any of our Phase 3 trials, the FDA will require us to place a clinical hold and we will need
to investigate the underlying cause, which in many patient populations may be difficult for us to assess imputability which may lead to
a complete halt of the clinical trial, may irreparably harm our red blood cell product’s reputation and may force us to suspend or
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terminate development activities related to the red blood cell system in the U.S., which would have a material adverse effect on our
business and business prospects. Should we see events where antibodies to amustaline (S-303) are formed without evidence of
hemolysis, the Data and Safety Monitoring Board, or DSMB, and we will need to assess the underlying information and either agree
to continue the study or either delay completion of the study or permanently halt the study until we can demonstrate that the antibodies
were not clinically significant. To date, two S-303 antibody events without evidence of hemolysis has been detected in the RedeS
study. We do not yet know if the S-303 antibody events were in the control or test arm, however the events are not clinically
significant. These events have been reviewed by the DSMB who did not express concerns with respect to patient safety. In addition, if
we are unable to generate sufficient perquisite Phase 3 clinical data and/or reach agreement with the FDA on a Phase 3 clinical trial
design for our red blood cell system, our agreement with BARDA will be severely limited in scope or could be terminated altogether,
and our ability to complete the development activities required for licensure in the U.S. may require additional capital beyond that
which we currently have. If alternative sources of funding are not available, we may be forced to suspend or terminate development
activities related to the red blood cell system in the U.S.
We completed our European Phase 3 clinical trials of our red blood cell system for acute anemia patients and separately for chronic
anemia patients. We filed our application for CE Mark approval of the red blood cell system in December 2018 under the MDD, and
understand that we will have to re-file under the new MDR from the existing MDD. Accordingly, we do not expect to receive any
regulatory approvals of our red blood cell system prior to 2022, if ever. We do not yet know whether the data generated from our
European Phase 3 clinical trials will be sufficient to receive CE Mark approval. Furthermore, we do not yet know if the clinical data
we have generated will be sufficient to satisfy the stricter standards imposed by the MDR, when we transition to that standard. If such
data is deemed insufficient, we may need to generate additional safety data in clinical trials to satisfy the MDR standards. We may
also need to generate additional safety data from commercial use in order to achieve broad market acceptance. In addition, the
European Phase 3 clinical trials in acute, and separately, chronic anemia patients, may need to be supplemented by additional,
successful Phase 3 clinical trials for approval in certain countries. If such additional Phase 3 clinical trials are required, they would
likely need to demonstrate equivalency of INTERCEPT-treated red blood cells compared to conventional, un-treated red blood cells
and the significantly lower lifespan for INTERCEPT-treated red blood cells compared to conventional, un-treated red blood cells may
limit our ability to obtain any regulatory approvals in certain countries for the red blood cell system. 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. In addition, if we are unable to secure the full amount of funding contemplated by the BARDA agreement for any reason, or if
the costs to complete the activities are more than allowed for by our BARDA agreement, our ability to complete the development
activities required for potential licensure in the U.S. may require additional capital beyond that which we currently have, and we may
be required to obtain additional capital in order to complete the development of and obtain any regulatory approvals for the red blood
cell system. Further, while we believe that our available cash and cash equivalents and short-term investments, as well as cash to be
received from product sales and under our agreement with BARDA, will be sufficient to meet our capital requirements for at least the
next twelve months, if we are unable to generate sufficient product revenue, or access sufficient funds under our BARDA agreement or
the public and private equity and debt capital markets, we may be unable to execute successfully on our operating plan. If alternative
sources of funding are not available, we may be forced to suspend or terminate development activities related to the red blood cell
system in the U.S. which would have a material adverse effect on our business and business prospects. If we are unsuccessful in
advancing the 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 R&D expenses incurred to date for 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, which costs may not be reimbursable to us
under the BARDA agreement. Even if we were to successfully complete and receive approval for our red blood cell system, potential
blood center customers may object to working with a potent chemical, like amustaline, the active compound in the red blood cell
system, or may require modifications to automate the process, which would result in additional development costs, any of which could
limit any market acceptance of the red blood cell system. If the red blood cell system were to face such objections from potential
customers, we may choose to pay for capital assets, specialized equipment or personnel for the blood center, which would have a
negative impact on any potential contribution margin from red blood cell system sales. Additionally, the use of the red blood cell
system may result in some processing loss of red blood cells. If the loss of red blood cells leads to increased costs, or the perception of
increased costs for potential customers, or potential customers believe that the loss of red blood cells reduces the efficacy of the
transfusion unit, or our process requires changes in blood center or clinical regimens, potential customers may not adopt our red blood
cell system even if approved for commercial sale.
Platelet and Plasma Systems
In 2007, we obtained a CE Mark approval from E.U. regulators for our platelet system under the MDD, and have subsequently
received a renewal in 2012 and again in 2017, in accordance with the five-year renewal schedule. While we are currently seeking an
extension of registration under the MDD, and plan to re-register our platelet system under the new MDR, we cannot assure you that an
extension under the MDD will be granted timely, if at all, or that our products will timely meet the requirements of the new MDR. We
or our customers have received approval for the sale and/or use of INTERCEPT-treated platelets within Europe in France,
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Switzerland, Germany and Austria. 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 due to changes in regulatory
law, our inability to maintain compliance with regulations or other factors.
In 2006, we obtained a CE Mark approval from E.U. regulators for our plasma system under the MDD, and have subsequently
received a renewal in 2011 and again in 2016, in accordance with the five-year renewal schedule. While we are currently seeking an
extension of registration under the MDD, and plan to re-register our plasma system under the new MDR, we cannot assure you that an
extension under the MDD will be granted timely, if at all, or that our products will timely meet the requirements of the new MDR. We
or our customers have received approval for the sale and/or use INTERCEPT-treated plasma within Europe in France, Switzerland,
Germany and Austria. 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. If we or our customers are
unable to obtain or maintain regulatory approvals for the use and sale or continued sale and use of INTERCEPT-treated platelets or
plasma, market adoption of our products will be negatively affected and our growth prospects would be materially and adversely
impacted.
The FDA has approved the platelet system for ex vivo preparation of pathogen-reduced apheresis platelet components collected and
stored in InterSol and 100% plasma in order to reduce the risk of transfusion-transmitted infection, or TTI, including sepsis, and as an
alternative to gamma irradiation for prevention of transfusion-associated graft versus host disease, or TA-GVHD. Additionally, the
FDA approved the plasma system for ex vivo preparation of pathogen-reduced, whole blood derived or apheresis plasma in order to
reduce the risk of TTI when treating patients requiring therapeutic plasma transfusion and as an alternative to gamma irradiation for
prevention of TA-GVHD. We have conducted and are conducting additional in vitro studies for our platelet system to potentially
expand our label claims to include, among others, platelets collected from pooled random donors, storage of INTERCEPT-treated
platelets for up to seven days rather than five days, and a new processing set for triple dose collections. Failure to obtain any of these
label expansion claims may negatively affect market adoption and our growth prospects would be materially and adversely affected.
As a condition to the initial FDA approval of the platelet system, we are required to conduct a post-approval clinical study of the
platelet system. Successful enrollment and completion of this study requires that we maintain sufficient INTERCEPT production
capabilities with U.S. blood center customers. Delays in supplying INTERCEPT products to blood centers that are providing
INTERCEPT-treated platelets to hospitals involved in the study may lead to increased costs to us and may jeopardize our ability to
complete the study in a timeframe acceptable to the FDA. Furthermore, blood centers’ ability to produce INTERCEPT-treated
platelets and supply hospitals enrolled in the study may be negatively impacted by a shortage of overall platelet availability,
constraints in producing platelets in compliance with our approved claims or operational inefficiencies experienced as a result of
INTERCEPT treatment. In addition, we must engage with hospitals that have the desire and ability to participate and contribute to the
study in a timely manner and who are willing to purchase INTERCEPT-treated platelets from our blood center customers. If we are
unable to complete this study, in a timely manner or at all, or the results of this study reveal unacceptable safety risks, we could be
required to perform additional studies, which may be costly, and even lose U.S. marketing approval of the platelet system. Further, we
are required to conduct a post-approval recovery and survival clinical study in connection with the label expansion approval for the
use of the platelet system to treat platelets suspended in 100% plasma. Successful enrollment and completion of this additional study
will also require that we identify and contract with hospitals that have the desire and ability to participate and contribute to the study in
a timely manner and who are willing to purchase INTERCEPT-treated platelets from our blood center customers. We have recently
learned that there may be a shortage of the radiolabel used for platelet recovery and survival studies. If our study sites are not able to
secure sufficient supply of the radiolabel, we will not be able to complete enrollment timely, if at all. If we are unable to complete this
study, in a timely manner or at all, or the results of this study reveal unacceptable safety risks, we could be required to perform
additional studies, which may be costly. In addition to these studies, the FDA may also require us to commit to perform other lengthy
post-marketing studies, for which we would have to expend significant additional resources, which could have an adverse effect on
our operating results, financial condition and stock price. In addition, there is a risk that these studies will show results inconsistent
with our previous studies. Should this happen, potential customers may delay or choose not to adopt the INTERCEPT Blood System
and existing customers may cease use of the INTERCEPT Blood System.
The execution and completion of the RedeS and ReCePI studies and planned or required clinical trials or studies will continue to result
in additional costs, and will continue to require attention and resources from our clinical, regulatory and management teams, which
may adversely affect our commercialization efforts and other regulatory and clinical programs.
Post-Marketing Approval
We are also required to continue to comply with applicable FDA and other regulatory requirements now that we have obtained approval
for the INTERCEPT Blood System for platelets and plasma. These requirements relate to, among other things, labeling, packaging,
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storage, advertising, promotion, record-keeping and reporting of safety and other information. In addition, our manufacturers and their
facilities are required to comply with extensive FDA and foreign regulatory agency requirements, including, in the U.S., ensuring that
quality control and manufacturing procedures conform to cGMP and current QSR requirements. As such, we and our contract
manufacturers are subject to continual review and periodic inspections. We understand that the manufacturing facility which produces our
platelet and plasma systems will be audited by the FDA in the near term. We and our contract manufacturers will need to satisfactorily
resolve and comply with adverse findings of the audit, if any. Complying with and resolving any audit findings may result in additional
costs, changes to our manufacturers quality management systems or both. Failure to timely resolve and comply to audit findings, if any,
may result in enforcement actions and may result in a disruption to the supply of our products. Accordingly, we and others with whom we
work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and
quality control. We are required to report certain adverse events and production problems, if any, to the FDA and foreign regulatory
authorities, when applicable, and must additionally comply with requirements concerning advertising and promotion for our products. For
example, our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the
prohibition of the promotion of unapproved, or off-label, use. If the FDA determines that our promotional materials or training constitutes
promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or
enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is
also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or training
materials to constitute promotion of an off-label use, or a violation or any other federal or state law that applies to us, such as laws
prohibiting false claims for reimbursement. Any enforcement action brought by a federal, state or foreign authority could result in
significant civil, criminal and/or administrative penalties, damages, fines, disgorgement, individual imprisonment, additional reporting
obligations and oversight if we become subject to a corporate integrity agreement or other agreement to resolve allocations of non-
compliance with these laws, exclusion from participation in government programs, such as Medicare and Medicaid, injunctions,
private “qui tam” actions brought by individual whistleblowers in the name of the government, or refusal to allow us to enter into
government contracts, contractual damages, administrative burdens, and diminished profits and future earnings. In addition, our
reputation could be damaged and adoption of the products could be impaired. Although our policy is to refrain from statements that could
be considered off-label promotion of our products, the FDA or another regulatory agency could disagree and conclude that we have
engaged in off-label promotion. In addition, the off-label use of our products may increase the risk of product liability claims. Product
liability claims are expensive to defend, divert our management’s attention, result in substantial damage awards against us and harm our
reputation. Regulatory authorities may also challenge the classification of our approvals for our products. For instance, we understand that
the Dutch Competent Health Authority has questioned whether or not our products should be regulated as a drug instead of a medical
device. While we and our notified body are confident in the current classification, we cannot assure you that regulators will conclude that
our products should continue to be regulated as a medical device. Should we have to comply with drug regulations, we will incur
additional costs, may need to generate additional data from studies to maintain approval and may be unable to comply timely, if ever.
Should a regulatory agency question a reported adverse event, we may not be able to rule out product failure as the cause, whether or
not product failure is the cause of the reported adverse event. If a regulatory agency suspects or discovers problems with a product,
such as adverse events of unanticipated severity or frequency, or problems with the facility or the manufacturing process at the facility
where the product is manufactured, or problems with the quality of product manufactured, or disagrees with the promotion, marketing,
or labeling of a product, a regulatory agency may impose restrictions on use of that product, including requiring withdrawal of the
product from the market. Our failure to comply with applicable regulatory requirements could result in enforcement action by
regulatory agencies, which may include any of the following sanctions:
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adverse publicity, warning letters, fines, injunctions, consent decrees and civil penalties;
repair, replacement, recall or seizure of our products;
operating restrictions or partial suspension or total shutdown of production;
delaying or refusing our requests for approval of new products, new intended uses or modifications to our existing
products and regulatory strategies;
refusal to grant export or import approval for our products;
withdrawing marketing approvals that have already been granted, resulting in prohibitions on sales of our products; and
criminal prosecution.
Any of these actions, in combination or alone, could prevent us from selling our products and harm our business. In addition, any
government investigation of alleged violations of law could require us to expend significant time and resources in response and could
generate negative publicity. Any failure to comply with ongoing or changing regulatory requirements may significantly and adversely
affect our ability to successfully commercialize and generate additional product revenues from our platelet and plasma systems or any
future products. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating
results will be adversely affected. Additionally, if we are unable to continue to generate product revenues from the sale of our platelet
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and plasma systems, our potential for achieving operating profitability will be diminished and the need for additional capital to fund
our operations will be increased.
Should we obtain approval of our red blood cell system, we will likely be required by regulators to collect additional data in patients
receiving INTERCEPT-treated red blood cells. In addition, we may be required to develop a registry of patients receiving
INTERCEPT-treated red blood cells for future data collection and evaluation. Should we become subject to such a requirement post-
approval, we may incur significant costs to develop, create and implement such a registry. Further, introducing and implementing use
of such a registry may face data collection challenges or resistance from transfusing physicians, hospitals or patients. We cannot
ensure that the data collected in such a registry would support continued use of INTERCEPT-treated red blood cells.
In addition, the regulations to which we are subject are complex and have become more stringent over time. Regulatory changes could
result in restrictions on our ability to carry on or expand our operations, increased operation costs or lower than anticipated sales. For
instance, we understand that we will have to re-register our CE Marked products under the new MDR, (as required by all
manufacturers who sell in Europe under a CE Mark), while we anticipate this will be a formality, there is always a possibility of new
requirements. Complying with the new MDR will require considerable time, attention and effort by our manufacturers and us and may
limit or delay any contemplated changes to our products or expansion of label claims.
A significant portion of the funding for the development of the red blood cell system is expected to come from our BARDA
agreement, and if BARDA were to eliminate, reduce or delay funding from our agreement, this could have a significant, negative
impact on our revenues and cash flows, and we may be forced to suspend or terminate our U.S. red blood cell development
program or obtain alternative sources of funding.
We anticipate that a significant portion of the funding for the development of the red blood cell system will come from our agreement
with BARDA. The agreement, including its subsequent modifications, provide for reimbursement of certain expenses incurred by us
for up to approximately $201.2 million to support the development of the red blood cell system. However, our agreement with
BARDA only reimburses certain specified development and clinical activities that have been authorized by BARDA pursuant to the
base period and certain options of the agreement and the potential exercise of subsequent option periods. To date, BARDA has
committed approximately $103.2 million under the base period of the agreement and options exercised. Accordingly, our ability to
receive any of the additional $98.0 million in funding provided for under the BARDA agreement is dependent on BARDA exercising
additional options under the agreement, which it may do or not do at its sole discretion. In addition, BARDA is entitled to terminate
our BARDA agreement for convenience at any time, in whole or in part, and is not required to provide continued funding beyond
reimbursement of amounts currently incurred and obligated by us as a result of contract performance. In addition, activities covered
under the base period and exercised options may ultimately cost more than is covered by the BARDA contract or require a longer
performance period to complete than is remaining on our agreement; if we are unable to secure additional funding or allow for
additional time for completion, we would have to incur additional costs to complete the activities or terminate the activities before
completion. Moreover, the continuation of our BARDA agreement depends in large part on our ability to meet development
milestones previously agreed to with BARDA and on our compliance with certain operating procedures and protocols. BARDA may
suspend or terminate the agreement should we fail to achieve key milestones, or fail to comply with the operating procedures and
processes approved by BARDA and its audit agency. There can be no assurance that we will be able to achieve these milestones or
continue to comply with these procedures and protocols. For instance, our RedeS study, which is being funded as part of our
agreement with BARDA, is currently being conducted in areas subject to disruption by severe weather such as flooding or hurricane.
Any severe weather or other natural disaster impact to sites enrolling our clinical trials may negatively impact our ability to continue
enrolling patients to complete our clinical trials. Our ability to meet the expectations of BARDA under our contract is largely
dependent on our ability to attract, hire and retain personnel with competencies that are in short supply. In addition, in many instances
we must identify third-party suppliers, negotiate terms acceptable to us and BARDA and ensure ongoing compliance by these
suppliers with the obligations covered by our BARDA agreement. If we are unable to provide adequate supplier oversight or if
suppliers are unable to comply with the requirements of the agreement, our ability to meet the anticipated milestones may be impaired.
There can also be no assurance that our BARDA agreement will not be terminated, that our BARDA agreement will be extended
through the exercise of subsequent option periods, that any such extensions would be on terms favorable to us, or that we will
otherwise obtain the funding that we anticipate to obtain under our agreement with BARDA. Moreover, changes in government
budgets and agendas may result in a decreased and deprioritized emphasis on supporting the development of pathogen reduction
technology. If our BARDA agreement is terminated or suspended, if there is any reduction or delay in funding under our BARDA
agreement, or if BARDA determines not to exercise some or all of the options provided for under the agreement, our revenues and
cash flows could be significantly and negatively impacted and we may be forced to seek alternative sources of funding, which may not
be available on non-dilutive terms, terms favorable to us or at all. If alternative sources of funding are not available, we may be forced
to suspend or terminate development activities related to the red blood cell system in the U.S.
In addition, under the BARDA agreement, BARDA will regularly review our development efforts and clinical activities. Under certain
circumstances, BARDA may advise us to delay certain activities and invest additional time and resources before proceeding. If we
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follow such BARDA advice, overall red blood cell program delays and costs associated with additional resources for which we had
not planned may result. Also, the costs associated with following such advice may or may not be reimbursed by BARDA under our
agreement. Finally, we may decide not to follow the advice provided by BARDA and instead pursue activities that we believe are in
the best interests of our red blood cell program and our business, even if BARDA would not reimburse us under our agreement.
Unfavorable provisions in government contracts, including in our contract with BARDA, may harm our business, financial
condition and operating results.
U.S. government contracts typically contain unfavorable provisions and are subject to audit and modification by the government at its
sole discretion, which will subject us to additional risks. For example, under our agreement with BARDA, the U.S. government has
the power to unilaterally:
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audit and object to any BARDA agreement-related costs and fees on grounds that they are not allowable under the Federal
Acquisition Regulation, or FAR, and require us to reimburse all such costs and fees;
suspend or prevent us for a set period of time from receiving new contracts or grants or extending our existing agreement
based on violations or suspected violations of laws or regulations;
claim nonexclusive, nontransferable rights to product manufactured and intellectual property developed under the
BARDA agreement and may, under certain circumstances involving public health and safety, license such inventions to
third parties without our consent;
cancel, terminate or suspend our BARDA agreement based on violations or suspected violations of laws or regulations;
terminate our BARDA agreement in whole or in part for the convenience of the government for any reason or no reason,
including if funds become unavailable to the U.S. Department of Health and Human Services’ Office of the Assistant
Secretary for Preparedness and Response;
reduce the scope and value of our BARDA agreement;
decline to exercise an option to continue the BARDA agreement;
direct the course of the development of the red blood cell system in a manner not chosen by us;
require us to perform the option periods provided for under the BARDA agreement even if doing so may cause us to
forego or delay the pursuit of other red blood cell program opportunities with greater commercial potential;
take actions that result in a longer development timeline than expected;
limit the government’s financial liability to amounts appropriated by the U.S. Congress on a fiscal-year basis, thereby
leaving some uncertainty about the future availability of funding for the red blood cell program even after it has been
funded for an initial period; and
change certain terms and conditions in our BARDA agreement.
Generally, government contracts, including our agreement with BARDA, contain provisions permitting unilateral termination or
modification, in whole or in part, at the U.S. government’s convenience. Termination-for-convenience provisions generally enable us
to recover only our costs incurred or committed (plus a portion of the agreed fee) and settlement expenses on the work completed prior
to termination. Except for the amount of services received by the government, termination-for-default provisions do not permit
recovery of fees. In addition, in the event of termination or upon expiration of our BARDA agreement, the U.S. government may
dispute wind-down and termination costs and may question prior expenses under the contract and deny payment of those expenses.
Should we choose to challenge the U.S. government for denying certain payments under our BARDA agreement, such a challenge
could subject us to substantial additional expenses that we may or may not recover. Further, if our BARDA agreement is terminated
for convenience, or if we default by failing to perform in accordance with the contract schedule and terms, a significant negative
impact on our cash flows and operations could result.
In addition, government contracts normally contain additional requirements that may increase our costs of doing business and expose
us to liability for failure to comply with these terms and conditions. These requirements include, for example:
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specialized accounting systems unique to government contracts;
mandatory financial audits and potential liability for price adjustments or recoupment of government funds after such
funds have been spent;
public disclosures of certain contract information, which may enable competitors to gain insights into our research
program;
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mandatory internal control systems and policies; and
mandatory socioeconomic compliance requirements, including labor standards, non-discrimination and affirmative action
programs and environmental compliance requirements.
If we fail to maintain compliance with these requirements, we may be subject to potential liability and to the termination of our
BARDA agreement.
Furthermore, we have entered into and will continue to enter into agreements and subcontracts with third parties, including suppliers,
consultants and other third-party contractors, in order to satisfy our contractual obligations under our BARDA agreement. Negotiating
and entering into such arrangements can be time-consuming and we may not be able to reach agreement with such third parties. Any
such agreement must also be compliant with the terms of our BARDA agreement. Any delay or inability to enter into such
arrangements or entering into such arrangements in a manner that is non-compliant with the terms of our contract, may result in
violations of our BARDA agreement.
As a result of the unfavorable provisions in our BARDA agreement, we must undertake significant compliance activities. The
diversion of resources from our development and commercial programs to these compliance activities, as well as the exercise by the
U.S. government of any rights under these provisions, could materially harm our business.
Laws and regulations affecting government contracts, including our BARDA agreement, make it more costly and difficult for us to
successfully conduct our business. Failure to comply with these laws and regulations could result in significant civil and criminal
penalties and adversely affect our business.
We must comply with numerous laws and regulations relating to the administration and performance of our BARDA agreement.
Among the most significant government contracting regulations are:
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the FAR and agency-specific regulations supplemental to the FAR, which comprehensively regulate the procurement,
formation, administration and performance of government contracts;
the business ethics and public integrity obligations, which govern conflicts of interest and the hiring of former government
employees, restrict the granting of gratuities and funding of lobbying activities and incorporate other requirements such as the
Anti-Kickback Statute, the Procurement Integrity Act, the False Claims Act and the U.S. Foreign Corrupt Practices Act;
export and import control laws and regulations; and
laws, regulations and executive orders restricting the exportation of certain products and technical data.
In addition, as a U.S. government contractor, we are required to comply with applicable laws, regulations and standards relating to our
accounting practices and are subject to periodic audits and reviews. As part of any such audit or review, the U.S. government may
review the adequacy of, and our compliance with, our internal control systems and policies, including those relating to our purchasing,
property, estimating, compensation and management information systems. Based on the results of its audits, the U.S. government may
adjust our BARDA agreement-related costs and fees, including allocated indirect costs. This adjustment could impact the amount of
revenues reported on a historic basis and could impact our cash flows under the contract prospectively. In addition, in the event
BARDA determines that certain costs and fees were unallowable or determines that the allocated indirect cost rate was higher than the
actual indirect cost rate, BARDA would be entitled to recoup any overpayment from us as a result. In addition, if an audit or review
uncovers any improper or illegal activity, we may be subject to civil and criminal penalties and administrative sanctions, including
termination of our BARDA agreement, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing
business with the U.S. government. We could also suffer serious harm to our reputation if allegations of impropriety were made
against us, which could cause our stock price to decline. In addition, under U.S. government purchasing regulations, some of our costs
may not be reimbursable or allowed under our contracts. Further, as a U.S. government contractor, we are subject to an increased risk
of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities as compared to private
sector commercial companies.
If we or our third-party suppliers fail to comply with the FDA’s or other regulatory agency’s good manufacturing practice
regulations, it could impair our ability to market our products in a cost-effective and timely manner.
In order to be used in clinical studies or sold in the U.S., our products are required to be manufactured in FDA-approved facilities. If
any of our suppliers fail to comply with FDA’s cGMP regulations or otherwise fail to maintain FDA approval, we may be required to
identify an alternate supplier for our products or components. For example, we understand that a source chemical produced by a
supplier to our contract manufacturer which uses the source chemical to produce a reagent for our red blood cell system, potentially
experienced discrepancies in its quality management system. If these discrepancies cannot be mitigated by other means, it could
negatively impact the usability of data generated in our clinical and in vitro studies which used that reagent or limit our ability to
timely complete ongoing clinical trials. Our products are complex and difficult to manufacture. Finding alternate facilities and
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obtaining FDA approval for the manufacture of the INTERCEPT Blood System at such facilities would be costly and time-consuming
and would negatively impact our ability to generate product revenue from the sale of our platelet or plasma system in the U.S. and
achieve operating profitability. Our red blood cell system also needs to be manufactured in FDA-approved facilities, several of which,
are not currently FDA-approved. Failure of our suppliers to meet cGMP regulations and failure to obtain or maintain FDA approval
will negatively impact our ability to achieve FDA approval for our red blood cell system or may require that we identify, qualify and
contract with alternative suppliers, if they are available, which would be time consuming, costly and result in further approval delays.
We and our third-party suppliers are also required to comply with the cGMP and QSR requirements, which cover the methods and
documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of
our products. The FDA and other regulatory agencies audit compliance with cGMP and QSR requirements through periodic
announced and unannounced inspections of manufacturing and other facilities. These audits and inspections may be conducted at any
time. We understand that the manufacturing facility which produces our platelet and plasma systems will be audited by the FDA in the
near term. If we or our suppliers fail to adhere to cGMP and QSR requirements, have significant non-compliance issues or fail to
timely and adequately respond to any adverse inspectional observations or product safety issues, or if any corrective action plan that
we or our suppliers propose in response to observed deficiencies is not sufficient, the FDA or other regulatory agency could take
enforcement action against us, which could delay production of our products and may include:
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untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
unanticipated expenditures to address or defend such actions;
customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;
operating restrictions or partial suspension or total shutdown of production;
refusing or delaying our requests for premarket approval of new products or modified products;
withdrawing marketing approvals that have already been granted;
refusal to grant export or import approval for our products; or
criminal prosecution.
Any of the foregoing actions could have a material adverse effect on our reputation, business, financial condition and operating
results. Furthermore, our key suppliers may not continue to be in compliance with all applicable regulatory requirements, which could
result in our failure to produce our products on a timely basis and in the required quantities, if at all. In addition, before any additional
products would be considered for marketing approval in the U.S. or elsewhere, our suppliers will have to pass an audit by the FDA or
other regulatory agencies. We are dependent on our suppliers’ cooperation and ability to pass such audits. Such audits and any audit
remediation may be costly. Failure to pass such audits by any of our suppliers would affect our ability to obtain licensure in the U.S.
or elsewhere.
If we modify our FDA-approved products, we may need to seek additional approvals, which, if not granted, would prevent us from
selling our modified products.
Any modifications to the platelet and plasma systems that could significantly affect their safety or effectiveness, including significant
design and manufacturing changes, or that would constitute a major change in their intended use, manufacture, design, components, or
technology requires approval of a new premarket approval application, or PMA, or PMA supplement. However, certain changes to a
PMA-approved device do not require submission and approval of a new PMA or PMA supplement and may only require notice to
FDA in a PMA Annual Report. The FDA requires every supplier to make this determination in the first instance, but the FDA may
review any supplier’s decision. The FDA may not agree with our decisions regarding whether new submissions or approvals are
necessary. Our products could be subject to recall if the FDA determines, for any reason, that our products are not safe or effective or
that appropriate regulatory submissions were not made. If new regulatory approvals are required, this could delay or preclude our
ability to market the modified system. For example, due to the obsolescence of certain parts, we have redesigned the illuminators used
in the platelet and plasma systems and may need to further redesign the illuminator. We will need to obtain regulatory approval of any
future redesign of the illuminator before it can be commercialized in the U.S. or under CE Mark. Further, certain plastics used to make
INTERCEPT disposable kits are no longer available. We have received CE Mark and FDA approval for our platelet and plasma
products using the alternate plastics though we still need to qualify, validate and obtain approval for those plastics in other
jurisdictions that require local regulatory approval before we can utilize them in worldwide commercial manufacturing. In addition, in
order to address the entire market in the U.S., we will need to obtain approval for additional configurations of the platelet system,
including triple dose collections and random donor platelets. We also understand that a solvent used to make the plastic beads in our
compound adsorption devices is no longer available and that a new material will need to be validated and approved by regulatory
agencies before we can manufacture and sell our products with that new material. Our approved labels from the FDA limit our current
approvals to certain platelet collection platforms and a particular storage solution for the particular collection platform. For instance,
our approved claims permit apheresis collection of platelets on the Fresenius Amicus device while stored in an additive solution or for
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apheresis collection of platelets collected on the Terumo Trima device and stored in 100% plasma. Such discrepant collection
methodologies and storage solutions and conditions also exist for red blood cells. We may be required to provide the FDA with data
for each permutation for which blood banking treatment practices exist which may be time consuming, costly and limit the potential
size of the U.S. market that can use our products. We have conducted and may conduct additional in vitro studies for our platelet
system to potentially expand our label claims to include, among others, platelets collected from pooled random donors, storage of
INTERCEPT-treated platelets for up to seven days rather than five days, and a new processing set for triple dose collections. Our
failure to obtain FDA and foreign regulatory approvals of new platelet and plasma product configurations could significantly limit
product revenues from sales of the platelet and plasma systems. In any event, delays in receipt or failure to receive approvals, the loss
of previously received approvals, or the failure to comply with any other existing or future regulatory requirements, could reduce our
sales and negatively impact our profitability potential and future growth prospects. In addition, if the FDA or other regulatory or
accrediting body were to mandate safety interventions, including the option of pathogen reduction technology, when we had not
received approval for all operational configurations, the market to which we could sell our products may be limited until we obtain
such approvals, if ever, or may be permanently impaired if competing options are more broadly available. In addition, we may seek to
expand use of our products under new PMA approvals or PMA supplements. For instance, we plan to perform in vitro studies and
seek a PMA supplement to use our plasma system to produce extended-storage cryoprecipitate and possibly for other plasma-derived
biological plasma products. Even if we were to receive approval for a PMA supplement for extended-storage cryoprecipitate, we may
not receive label claims for all indications or for indications with the highest unmet need or market acceptance. The market dynamics
may require or we may choose to pursue a change in business model whereby we are selling the finished component to hospitals rather
than an illuminator and disposable kit to blood centers. While we are working on implementing the infrastructure we believe will be
necessary to market an approved extended-storage cryoprecipitate product directly to hospitals subsequent to potential regulatory
approval of any PMA supplement that we may propose to submit to the FDA, we have no experience selling to hospitals nor do we
have experience or expertise complying with regulations governing finished biologics. If we are unable to successfully market such
products to hospitals or comply with unique regulations, our ability to monetize and deliver such products will be negatively impacted.
We operate a complex global commercial organization, with limited experience in many countries, including the U.S. We have
limited resources and experience complying with regulatory, legal, tax and political complexities as we expand into new and
increasingly broad geographies.
We are responsible for worldwide sales, marketing, distribution, maintenance and regulatory support of the INTERCEPT Blood
System. If we fail in our efforts to develop or maintain such internal competencies or establish acceptable relationships with third
parties to support us in these areas on a timely basis, our ability 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 Europe, the CIS and the Middle East. Our commercial activities for the U.S., Latin and South America and Asia are
based out of our headquarters in Concord, California with certain support from our European headquarters in the Netherlands, with
certain individuals servicing Latin and South America and Asia, domiciled outside of the U.S. Our commercial organization focused
on the U.S. market has limited resources and is relatively inexperienced, and as a result, has limited to no experience selling and
marketing our platelet and plasma systems. Given the relatively concentrated customer base in the U.S., coupled with the FDA
guidance document on platelet safety requiring all blood centers to comply by March 2021 by using a relatively small number of
options, including INTERCEPT Blood System for platelets, should blood centers deploy INTERCEPT Blood System for platelets
rapidly, our resources may be inadequate to fulfill the demands, which could result in a loss of product revenues or customer contracts,
or both. We will need to maintain and may need to increase our competence and size in a number of functions, including sales,
deployment and product support, marketing, regulatory, inventory and logistics, customer service, credit and collections, risk
management, and quality assurance systems in order to successfully support our commercialization activities in all of the jurisdictions
we currently sell and market, or anticipate selling and marketing, our products. Many of these competencies require compliance with
U.S., E.U., South American, Asian and local standards and practices, including regulatory, legal and tax requirements, some of which
we have limited experience. In this regard, should we obtain regulatory approval in an increased number of geographies, we will need
to ensure that we maintain a sufficient number of personnel or develop new business processes to ensure ongoing compliance with the
multitude of regulatory requirements in those territories. Hiring, training and retaining new personnel is costly, time consuming and
distracting to existing employees and management. We have limited experience operating on a global scale and we may be
unsuccessful complying with the variety and complexity of laws and regulations in a timely manner, if at all. In addition, in some
cases, the cost of obtaining approval and maintaining compliance with certain regulations and laws may exceed the product revenue
that we recognize from such a territory, which would adversely affect our results of operations and could adversely affect our financial
condition. Furthermore, we may choose to seek alternative ways to sell or treat blood components with our products. These may
include new business models, which may include selling kits to blood centers, performing inactivation ourselves, staffing blood
centers or selling services or other business model changes. We have no experience with these types of business models, or the
regulatory requirements or licenses needed to pursue such new business models. Additionally, such business models may be viewed as
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a threat to existing customers. We cannot assure you that we will pursue such business models or if we do, that we will be successful
or that our existing customers will not feel threatened.
Following the result of a referendum in 2016, the U.K. left the E.U. on January 31, 2020, commonly referred to as “Brexit.” We may
face new regulatory costs and challenges as a result of Brexit that could have a material adverse effect on our operations. In addition,
Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws
to replace or replicate. Altered regulations could add time and expense to the process by which our product candidates receive
regulatory approval in the E.U. Given the lack of comparable precedent, it is unclear what financial, regulatory, trade and legal
implications the withdrawal of the U.K. from the E.U. will have and how such withdrawal will affect us.
We rely on third parties to market, sell, distribute and maintain our products and to maintain customer relationships in certain
countries.
We have entered into distribution agreements, generally on a geographically exclusive basis, with distributors in certain regions. We
rely on these distributors to obtain and maintain any necessary in-country regulatory approvals, as well as 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. Generally, our distribution agreements require distributors to purchase minimum
quantities in a given year over the term of the agreement. Failure by our distributors to meet these minimum purchase obligations may
impact our financial results. In addition, failure by our distributors to provide an accurate forecast impacts our ability to predict the
timing of product revenue and our ability to accurately forecast our product supply needs. While our contracts generally require
distributors to exercise diligence, these distributors may fail to commercialize the INTERCEPT Blood System in their respective
territories. For example, our distributors may fail to sell product inventory they have purchased from us to end customers or may sell
competing products ahead of or in conjunction with INTERCEPT. In addition, initial purchases of illuminators or INTERCEPT
disposable kits by these third parties may not lead to follow-on purchases of platelet and plasma systems’ disposable kits. 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. Further, 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. In addition, although our agreements with our distributors generally require compliance with local anti-corruption
laws, the U.S. Foreign Corrupt Practices Act, and other local and international regulations, we have limited ability to control the
actions of our distributors to ensure they are in compliance. Noncompliance by a distributor could expose us to civil or criminal
liability, fines and/or prohibitions on selling our products in certain countries.
Currently, a fairly concentrated number of distributors make up a significant portion of our product revenue and we may have little
recourse, short of termination, in the event that a distributor fails to execute according to our expectations and contractual provisions.
In the past, we have experienced weaker than expected growth due to declining performance by certain of our distributors.
Periodically, we transition certain territories to new distribution partners or our direct sales force where we believe we can improve
performance relative to the distributor. Because new distribution partners or our direct sales force may have limited experience
marketing and selling our products in certain territories, or at all, we cannot be certain that they will perform better than the
predecessor distributor. In certain cases, our distributors hold the regulatory approval to sell INTERCEPT for their particular
geography. Termination, loss of exclusivity or transitioning from these distributors may require us to negotiate a transfer of the
applicable regulatory approvals to us or new distributors which may be difficult to do in a timely manner, or at all. We expect that our
product revenue will be adversely impacted with the loss or transition of one or more of these distributors. If we choose to terminate
distributor agreements, we would either need to reach agreement with, qualify, train and supply a replacement distributor or supply
and service end-user customer accounts in those territories ourselves. Although our distribution agreements generally provide that the
distributor will promptly and efficiently transfer its existing customer agreements to us, there can be no assurance that this will happen
in a timely manner or at all or that the distributor will honor its outstanding commitments to us. In addition, terminated distributors
may own illuminators placed at customer sites and may require us to repurchase those devices or require end-user customers to
purchase new devices from us. Additionally, we may need terminated distributors to cooperate with us or a new distributor in
transitioning sub-distributor relationships and contracts, hospital contracts, public tenders, or regulatory certificates or licenses held in
their name. These factors may be disruptive for our customers and our reputation may be damaged as a result. Our distribution
partners may have more established relationships with potential end user customers than a new distributor or we may have in
particular territory, which could adversely impact our ability to successfully commercialize our products in these territories. In
addition, it may take longer for us to be paid if payment timing and terms in these new arrangements are less favorable to us than those
in our existing distributor arrangements. As we service end-user accounts directly rather than through distributors, we incur additional
expense, our working capital is negatively impacted due to longer periods from cash collection from direct sales customers when
compared to the timing of cash collection from our former distribution partners and we may be exposed to additional complexity
including local statutory and tax compliance. Current or transitioning distributors may irreparably harm relationships with local
existing and prospective customers and our standing with the blood banking community in general. In the event that we are unable to
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find alternative distributors or mobilize our own sales efforts in the territories in which a particular distributor operates, customer
supply, our reputation and our operating results may be adversely affected. In addition, in territories where new distributors are
responsible for servicing end-user accounts, there will be a period of transition in order to properly qualify and train these new
distributors, which may disrupt the operations of our customers and adversely impact our reputation and operating results.
Our products are a novel technology in the U.S. and blood centers and clinicians have little to no experience with pathogen
reduction systems. Further, we have no prior experience commercializing products in the U.S. We may be unable to develop and
maintain an effective and qualified U.S. based commercial organization or educate blood centers, clinicians and hospital
personnel. As a result, we may not be able to successfully educate the market on the value of pathogen reduction or commercialize
our products in the U.S.
Our ability to generate significant product revenue from our platelet and plasma systems depends in part on our ability to achieve
market acceptance of, and to otherwise effectively market, our platelet and plasma systems in the U.S. Even if we are able to achieve
market acceptance in the U.S. or newly commercialized markets, we have provided and may provide adoption incentives in the future
which may negatively impact our reported sales. Successfully commercializing our products in the U.S. may take considerable time
during which we will need to build and maintain relationships, additional routine-use data and trust from the industry. We need to
attract, retain, train and support sales, marketing and scientific and hospital affairs personnel and other commercial talent. For
example, we need to attract and retain hospital affairs professionals to help educate hospitals and physicians on our products, clinical
trial history and publications. Hospital affairs professionals are highly educated and trained professionals and the hiring and
employment market for hospital affairs professionals is highly competitive. As such, we need to commit significant additional
management and other resources in order to maintain and potentially expand our hospital affairs team and sales and marketing
functions. We may be unable to develop and maintain adequate hospital affairs, sales and marketing capabilities for the U.S. market
and we also may not be able to devote sufficient resources to the advertising, promotion and sales efforts for the platelet and plasma
systems in the U.S. We will also have to compete with other life sciences and medical device companies to recruit, hire, train and
retain the hospital affairs, sales and marketing personnel that we anticipate we need. For these and other reasons, we may be unable to
develop and maintain an effective and qualified U.S.-based commercial organization in a cost-effective manner or realize a positive
return on our investment. If we are unable to develop and maintain an effective and qualified U.S.-based commercial organization in a
timely manner or at all, we may fail to realize the full sales potential of our platelet and plasma systems in the U.S. In addition, should
we seek and obtain approval for unique biological products created by use of the INTERCEPT blood system, including extended-
storage cryoprecipitate, we may choose to sell the treated end product directly to hospitals using our commercial organization. While
we are working on implementing the infrastructure we believe will be necessary to market an approved extended-storage
cryoprecipitate product directly to hospitals subsequent to potential regulatory approval of any PMA supplement that we may propose
to submit to the FDA, we have no experience selling biological end products directly to hospitals which may cause a distraction for
our commercial organization or we may be viewed as a competitive threat to our blood center customers. Even if we were to receive
approval for a PMA supplement for extended-storage cryoprecipitate, we may not receive label claims for all indications or for
indications with the highest unmet need or market acceptance.
Our manufacturing supply chain exposes us to significant risks.
We do not own our own manufacturing facilities, but rather manufacture our products using a number of third-party suppliers, many
of whom are our sole suppliers for the particular product or component that we procure. We rely on various contracts and our
relationships with these suppliers to ensure that the sourced products are manufactured in sufficient quantities, timely, to our exact
specifications and at prices we agree upon with the supplier. The price that we pay to some of our suppliers is dependent on the
volume of products or components that we order. If we are unable to meet the volume tiers that afford the most favorable pricing, our
gross margins will be negatively impacted.
In October 2015, we amended and restated our manufacturing and supply agreement with Fresenius. Under the amended agreement,
Fresenius is obligated to sell, and we are obligated to purchase finished disposable kits for the platelet, plasma and red blood cell kits
from Fresenius with certain exceptions permitted. The initial term of the amended agreement extends through July 1, 2025, and is
automatically renewed thereafter for additional two-year renewal terms, subject to termination by either party upon (i) two years
written notice prior to the expiration of the initial term or (ii) one year written notice prior to the expiration of any renewal term. We
and Fresenius each have normal and customary termination rights, including termination for material breach. Fresenius is our sole
supplier for the manufacture of these products. Fresenius may fail to manufacture an adequate supply of INTERCEPT disposable kits
which would harm our business. Disruptions to our supply chain as a result of any potential ensuing protests, strikes or other work-
stoppages would be detrimental to our business and operating results. In the event Fresenius refuses or is unable to continue operating
under the agreement, we may be unable to maintain inventory levels or otherwise meet customer demand, and our business and
operating results would be materially and adversely affected.
We also have contracts with other third-party suppliers, including Ash Stevens for the manufacture of amotosalen, our proprietary
compound for reducing pathogens that is used in our platelet and plasma systems; Purolite, and separately, Porex, for the manufacture
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of components of the compound adsorption devices used in our platelet and plasma systems; and Nova for the manufacture of
illuminators and certain components of the INTERCEPT Blood System. These independent suppliers are currently our sole qualified
suppliers for such components and products.
Our manufacturing and supply agreement with Ash Stevens automatically extended at the end of 2019 and now continues until
December 31, 2021, and will continue to automatically renew thereafter for periods of two years each, but may be terminated by Ash
Stevens provided that Ash Stevens notifies us in writing at least two years in advance. We have not been notified by Ash Stevens of
their intention to terminate the agreement. Although we are not subject to minimum annual purchase requirements under the
manufacturing and supply agreement with Ash Stevens, we may be required to pay a maintenance fee of up to $50,000 a year if
specified quantities of amotosalen are not purchased in any year. We have incurred these maintenance fees in the past and may incur
these maintenance fees in future periods.
In April 2017, we entered into an amended and restated manufacturing and supply agreement with Porex for the continued supply of
the compound adsorption devices. Porex is our sole supplier for certain components of and manufacturing of the compound adsorption
devices. Under the amended and restated Porex agreement, we are no longer subject to a minimum annual purchase requirement;
however, Porex has the right to terminate the agreement, upon twelve months’ prior written notice, if annual production falls below a
mutually agreed threshold. The amended and restated Porex agreement was renewed as of January 1, 2020, for additional two years. In
addition, we entered into an amended and restated supply agreement with Brotech Corporation d/b/a Purolite Company, or Purolite,
for the supply of raw materials used to make the compound adsorption devices. The amended supply agreement expires in April 2021
and will automatically renew for an additional year unless either party has provided notice not to renew at least two years prior to the
expiration. Under the terms of the amended agreement, pricing is volume based and is subject to annual, prospective adjustments
based on a Producer Price Index subject to an annual cap. Our agreement with Nova, which manufacturers our illuminators, currently
extends through September 2020 and is automatically renewable for one year terms, but may be terminated by Nova on at least twelve
months’ prior written notice. We have not been notified by Nova of their intention to terminate the agreement.
Facilities at which the INTERCEPT Blood System or its components are manufactured may cease operations for planned or
unplanned reasons or may unilaterally change the formulations of certain commercially available reagents that we use, causing at least
temporary interruptions in supply. In addition, given our recent rapid growth and potential for continued or even accelerated growth,
we may need to identify, validate and qualify additional manufacturing capacity with existing or new suppliers. Further, customer
demand for our platelet kits may fully utilize the production capacity of our third-party manufacturer(s), as a result we may need to
allocate manufacturing resources such that our supply of platelet kits or plasma kits could be adversely impacted. Even a temporary
failure to supply adequate numbers of INTERCEPT Blood System components may cause an irreparable loss of customer goodwill
and potentially irreversible loss of momentum in the marketplace. Although we are actively evaluating alternate suppliers for certain
components, we do not have qualified suppliers or capacity beyond those on which we currently rely, and we understand that
Fresenius relies substantially on sole suppliers of certain materials for our products. In addition, suppliers from whom our contract
manufacturers source components and raw materials may cease production or supply of those components to our contract
manufacturers. For example, we understand that a compound adsorbent housing component is no longer available and an alternate
housing will need to be qualified by Fresenius. Identification and qualification of alternate suppliers is time consuming and costly, and
there can be no assurance that we will be able to demonstrate equivalency of alternate components or suppliers or that we will receive
regulatory approval in the U.S. or other jurisdictions. If we conclude that supply of the INTERCEPT Blood System or components
from suppliers 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 faster than we anticipate and may cause our supply chain to be less efficient.
Currently Nova is manufacturing illuminators to meet customer demand and maintain our own inventory levels. Subject to
obsolescence, we may be required to identify and qualify replacement components for illuminators and in doing so, we may be
required to conduct additional studies, which could include clinical trials to demonstrate equivalency or validate any required design
or component changes. We and our customers rely on the availability of spare parts to ensure that customer platelet and plasma
production is not interrupted. If we are not able to supply spare parts for the maintenance of customer illuminators, our ability to keep
existing customers, increase production for existing customers or sign up new customers may be negatively impacted. Due to the
obsolescence of certain parts, we have redesigned the illuminators used in the platelet and plasma systems and may need to further
redesign the illuminator. We will need to obtain regulatory approval of any future redesign of the illuminator before it can be
commercialized in the U.S. or under CE Mark. Our failure to obtain regulatory approvals of a new illuminator could constrain our
ability to penetrate our markets and may otherwise significantly limit product revenue from sales of the platelet and plasma systems.
In any event, delays in receipt or failure to receive these approvals could reduce our sales and negatively impact our profitability
potential and future growth prospects. Furthermore, we understand that components used in the illuminator are no longer
commercially available beyond what we and Nova have stockpiled or to which we have access under final buy transactions or may
become unavailable in the current specifications in the near-term. As with our disposable sets, if we conclude that supply of
components or spare parts for the illuminators is uncertain, we may choose to purchase and maintain inventories of such components
or spare parts, which would consume capital resources faster than we anticipate and may cause our supply chain to be less efficient.
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We are and will need to continue investing in subsequent versions of the illuminator to enhance functionality and manage
obsolescence. In addition, our illuminators contain embedded proprietary software that runs on software code we have developed and
that we own. Changes to certain components due to obsolescence, illuminator redesign or market demand, may require us to modify
the existing software code or to develop new illuminator software. Our ability to develop new illuminator software, correct coding
flaws and generally maintain the software code is reliant on third-party contractors who, in some cases, have sole knowledge of the
software code. Our ability to develop and maintain the illuminator software may be impaired if we are not able to continue contracting
with those key third-party contracted developers or if we are unable to source alternate employees or consultants to do so. Software
development is inherently risky and may be time consuming and costly.
In the event that alternate manufacturers are identified and qualified, we will need to transfer know-how relevant to the manufacture of
the INTERCEPT Blood System to such alternate manufacturers; however, certain of our supplier’s materials, manufacturing processes
and methods are proprietary to them, which will impair our ability to establish alternate sources of supply, even if we are required to
do so as a condition of regulatory approval. We may be unable to establish alternate 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 and
approvals. 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. 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. We cannot
assure you that any amendments to existing manufacturing agreements or any new manufacturing agreements that we may enter into
will contain terms more favorable to us than those that we currently have with our manufacturers. Many of the existing agreements we
have with suppliers contain provisions that we have been operating under for an extended period of time, including pricing. Should we
enter into agreements or amend agreements with any manufacturer with less favorable terms, including pricing, our results of
operations may be impacted, our recourse against such manufacturers may be limited, and the quality of our products may be
impacted.
Raw materials, components or finished product may not meet specifications or may be subject to other nonconformities. In the past,
non-conformities in certain component lots have caused delays in manufacturing of INTERCEPT disposable kits. Similarly, we have
experienced non-conformities and out of specification results in certain component manufacturing needed for clinical use, commercial
sale and regulatory submissions. Non-conformities can increase our expenses and reduce gross margins or result in delayed regulatory
submissions or clinical trials. Should non-conformities occur in the future, we may be unable to manufacture products to support our
red blood cell clinical trials, or to meet customer demand for our commercial products, which would result in delays for our clinical
programs, or lost sales for our commercial products, and could cause irreparable damage to our customer relationships. Later
discovery of problems with a product, manufacturer or facility may result in additional restrictions on the product, manufacturer or
facility, 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 could be
harmed and we would incur unforeseen losses.
In the event of a failure by Fresenius 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. Many
of our supply agreements contain limitations on incidental and consequential damages that we may recover. A supplier’s 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 or may impair our ability to supply customers with product.
We may encounter unforeseen manufacturing difficulties which, at a minimum, may lead to higher than anticipated costs, scrap rates,
or delays in manufacturing products. In addition, we may not receive timely or accurate demand information from distributors or
direct customers, or may not accurately forecast demand ourselves for the INTERCEPT Blood System. Should actual demand for our
products exceed our own forecasts or forecasts that customers provide, we may be unable to fulfill such orders timely, if at all. Should
we be unable to fulfill demand, particularly if mandated by a public health authority or as included in the FDA platelet safety guidance
document, our reputation and business prospects may be impaired. Further, certain distributors and customers require, and potential
future distributors or customers may require, product with a minimum shelf life. If customers requiring minimum shelf-lives order
smaller quantities or do not purchase product as we anticipate, or at all, we may have elevated inventory levels with relatively short
shelf-lives which may lead to increased write-offs and inefficient use of our cash. Should we choose not to fulfill smaller orders with
minimum shelf lives, our product sales may be harmed. We will need to destroy or consume outdated inventory in product
demonstration activities, which may in turn lead to elevated product demonstration costs and/or reduced gross margins. In order to
meet minimum shelf-life requirements, we may need to manufacture sufficient product to meet estimated forecasted demand. 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. Our platelet and plasma systems’ disposable kits have 18 to
24 months shelf lives from the date of manufacture. Should we change or modify any of our product configurations or components,
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such future configurations of our products may not achieve the same shelf life that existing products have. We and our distributors
may be unable to ship product to customers prior to the expiration of the product shelf life, a risk that is heightened if we elect to
increase our inventory levels in order to mitigate supply disruptions. We have entered into certain public tenders, some of which call
for us to maintain certain minimum levels of inventory. If our suppliers fail to produce components or our finished products
satisfactorily, timely, 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 penalty fees, permanent harm to our customer relations or loss of
customers. In addition, certain large national prospective customers, like those in the U.K. or Japan, may choose to convert all of their
operation to INTERCEPT. Should we or our suppliers encounter any manufacturing issues, we may not be able to satisfy all of the
global demand or may have to allocate available product to certain customers which may negatively impact our customers operations
and consequently, our reputation. Conversely, we may choose to overstock inventory in order to mitigate any unforeseen potential
disruption to manufacturing which could consume our cash resources faster than we anticipate and may cause our supply chain to be
less efficient. Additionally, should we conclude that existing suppliers are not able to produce sufficient quantities to meet the demand
for our products, we may choose to invest in manufacturing capacity at existing or new facilities with existing or new suppliers, which
could be costly and disruptive to our management.
Certain regions that we sell into or may sell into in the future may give priority to those products that are manufactured locally in their
jurisdiction. Our failure to meet these local manufacturing conditions may prevent us from successfully commercializing our product
in those geographies. In addition, should we choose to manufacture locally in those jurisdictions, we would likely incur additional
costs, may be unable to meet our quality system requirements or successfully manufacture products, and such activities will be a
distraction from our current focus and operations. We have no experience manufacturing or working with manufacturers outside of
our current manufacturing footprint.
Obsolescence or shortage of raw materials, key components of and accessories to the INTERCEPT Blood System, may impact our
ability to supply our customers, may negatively impact the operational costs of our customers and may increase the prices at which
we sell our products, resulting in slower than anticipated growth or negative future financial performance.
The manufacture, supply and availability of key components of, and accessories to, our products are dependent upon a limited number
of third parties and the commercial adoption and success of our products is dependent upon the continued availability of these
components or accessories. For example, our customers rely on continued availability of third-party supplied plastics, saline and
reagents for processing, storing and manufacturing blood components. If the blood product industry experiences shortages of these
components or accessories, the availability and use of our products may be impaired.
With respect to the manufacture of our products, our third-party manufacturers source components and raw materials for the
manufacture of the INTERCEPT processing sets. Certain of these components are no longer commercially available, are nearing end-
of-life or are available only from a limited number of suppliers. We and our third-party manufacturers do not have guaranteed supply
contracts with all of the raw material or component suppliers for our products, which magnify the risk of shortage and obsolescence
and decreases our manufacturers’ ability to negotiate pricing with their suppliers. For example, a solvent used in the manufacture of a
raw material for our compound adsorption device is no longer available. Our contract manufacturer has produced a substantial amount
of the raw material using its remaining inventory of the solvent as a last time purchase. However, the amount of material is finite and
we and our contract manufacturer will need to qualify an alternate solvent used in the manufacture of the raw material. This latest raw
material has not consistently met our specifications after further processing into components. If we are unable to use all of the raw
material produced during the final production run, or if the final material produces suboptimal results, we may need to seek changes to
our platelet system operating parameters from regulators, require customers to modify their operating practices, or run out of material
before an alternate material can be qualified. We have asked regulators to allow for a higher residual amotosalen level in
INTERCEPT-treated platelet products and we can provide no assurance that regulators will agree to the higher amotosalen levels on a
timely manner or at all. Should we be unsuccessful in this or any of the aforementioned initiatives, we may be unable to provide
customers with product to meet their production needs which may cause irreparable harm in the marketplace. Customers may object to
changes in operating practices or changes to the instructions for use, and a potential negative impact on their operations as a result of
the use of this material could impair our reputation or customer acceptance of our products. Any shortage or obsolescence of raw
materials, components or accessories or our inability to control costs associated with raw materials, components or accessories, could
increase our costs to manufacture our products. Further, if any supplier to our third-party manufacturers is unwilling or unable to
provide high quality raw materials in required quantities and at acceptable prices, our manufacturers may be unable to find alternative
sources or may fail to find alternative suppliers at commercially acceptable prices, on satisfactory terms, in a timely manner, or at all.
Furthermore, we do not yet know whether or not certain components used by blood center operators or used in the production of
INTERCEPT will be able to successfully comply with the new standards under the MDR. Failure to comply with the new standards
timely may result in a disruption to blood center operations or the manufacture of the INTERCEPT Blood System. If any of these
events were to occur, our product quality, competitive position, reputation and business could suffer, we could experience
cancellations of customer orders, refusal by customers to accept deliveries or a reduction in our prices and margins to the detriment of
our financial performance and results of operations.
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We are subject to federal, state and foreign laws governing our business practices which, if violated, could result in substantial
penalties and harm our reputation and business.
We are subject to a number of laws that affect our sales, marketing and other promotional activities by limiting the kinds of financial
arrangements we may have with hospitals, physicians, healthcare providers or other potential purchasers of our products. These laws
are often broadly written, and it is often difficult to determine precisely how these laws will be applied to specific circumstances. For
example, within the E.U., the control of unlawful marketing activities is a matter of national law in each of the member states. The
member states of the E.U. closely monitor perceived unlawful marketing activity by companies. We could face civil, criminal and
administrative sanctions if any member state determines that we have breached our obligations under its national laws. Industry
associations also closely monitor the activities of member companies. If these organizations or authorities name us as having breached
our obligations under their regulations, rules or standards, our reputation would suffer and our business and financial condition could
be adversely affected.
In addition, there are numerous U.S. federal, state and local healthcare regulatory laws, including, but not limited to, anti-kickback
laws, false claims laws, privacy laws, and transparency laws. Our relationships with healthcare providers and entities, including but
not limited to, hospitals, physicians, healthcare providers and our customers are subject to scrutiny under these laws. Violations of
these laws can subject us to penalties, including, but not limited to, administrative, civil and criminal penalties, damages, fines,
disgorgement, imprisonment, exclusion from participation in federal and state healthcare programs, including the Medicare and
Medicaid programs, additional reporting requirements and/or oversight if we become subject to a corporate integrity agreement or
similar agreement to resolve allegations of non-compliance with these laws, and the curtailment of our operations. Healthcare fraud
and abuse regulations are complex, and even minor irregularities can potentially give rise to claims that a statute or prohibition has
been violated. The laws that may affect our ability to operate include, but are not limited to:
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the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully
offering, paying, soliciting, or receiving any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in
exchange for or to induce, the referral of an individual for, the purchase, lease, order or recommendation of, any good,
facility, item or service for which payment may be made, in whole or in part, under federal healthcare programs such as
Medicare and Medicaid;
federal false claims laws, including the federal False Claims Act, that prohibit, among other things, knowingly presenting,
or causing to be presented, claims for payment or approval from Medicare, Medicaid or other federal payors that are false
or fraudulent, or knowingly making a false statement to improperly avoid, decrease or conceal an obligation to pay money
to the federal government, and which may apply to entities that provide coding and billing advice to customers;
the civil monetary penalties statute, which imposes penalties against any person or entity who, among other things, is
determined to have presented or caused to be presented, a claim to a federal healthcare program that the person knows, or
should know, is for an item or service that was not provided as claimed or is false or fraudulent;
the federal Health Insurance Portability and Accountability Act of 1996, as amended, or HIPAA, which created federal
criminal laws that prohibit executing a scheme to defraud any healthcare benefit program, including private payors, or
making false statements relating to healthcare matters;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH,
and their respective implementing regulations, which impose requirements on certain covered healthcare providers, health
plans and healthcare clearinghouses as well as their business associates that perform services for them that involve
individually identifiable health information, relating to the privacy, security and transmission of individually identifiable
health information without appropriate authorization, including mandatory contractual terms as well as directly applicable
privacy and security standards and requirements;
the federal transparency requirements under the Physician Payments Sunshine Act, enacted as part of the ACA, that
require applicable manufacturers of covered drugs, devices, biologics and medical supplies for which payment is available
under Medicare, Medicaid, or the Children's Health Insurance Program, with specific exceptions, to track and annually
report to the Centers for Medicare & Medicaid Services, or CMS, payments and other transfers of value provided to
physicians and teaching hospitals, and certain ownership and investment interests held by physicians or their immediate
family members;
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the Federal Trade Commission Act and similar laws regulating advertisement and consumer protections; and
foreign, or U.S. state or local law equivalents of each of the above federal laws, such as anti-kickback and false claims
laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers; U.S. state
laws that require device companies to comply with the industry’s voluntary compliance guidelines and the relevant
compliance guidance promulgated by the U.S. federal government or otherwise restrict payments that may be made to
healthcare providers; U.S. state and local laws that require device manufacturers to report information related to payments
and other transfers of value to physicians and other healthcare providers or marketing expenditures; and U.S. state laws
governing the privacy and security of certain health information, many of which differ from each other in significant ways
and often are not preempted by HIPAA, thus complicating compliance efforts.
We are also subject to foreign laws and regulations covering data privacy and the protection of health-related and other personal
information. In this regard, E.U. member states and other foreign jurisdictions, including Switzerland, have adopted data protection
laws and regulations which impose significant compliance obligations. Moreover, effective May 25, 2018, the collection and use of
personal health data in the E.U. is governed by the provisions of the E.U. General Data Protection Regulation, or the GDPR. The
GDPR, which is wide-ranging in scope, imposes several requirements relating to the control over personal data by individuals to
whom the personal data relates, the information provided to the individuals, the documentation we must maintain, the security and
confidentiality of the personal data, data breach notification and the use of third-party processors in connection with the processing of
personal data. The GDPR also imposes strict rules on the transfer of personal data out of the E.U., provides an enforcement authority
and authorizes the imposition of large penalties for noncompliance, including the potential for fines of up to €20 million or 4% of the
annual global revenues of the non-compliant company, whichever is greater. The GDPR requirements apply not only to third-party
transactions, but also to transfers of information between us and our subsidiary, including employee information. The GDPR has
increased our responsibility and potential liability in relation to personal data that we process compared to prior E.U. law, including in
clinical trials, and we may be required to put in place additional mechanisms to ensure compliance with the GDPR, which could divert
management’s attention and increase our cost of doing business. However, despite our ongoing efforts to bring our practices into
compliance with the GDPR, we may not be successful either due to various factors within our control or other factors outside our
control. It is also possible that local data protection authorities may have different interpretations of the GDPR, leading to potential
inconsistencies amongst various E.U. member states. Any failure or alleged failure (including as a result of deficiencies in our
policies, procedures or measures relating to privacy, data security, marketing or communications) by us to comply with laws,
regulations, policies, legal or contractual obligations, industry standards or regulatory guidance relating to privacy or data security,
may result in governmental investigations and enforcement actions, litigation, fines and penalties or adverse publicity. In addition,
new regulation, legislative actions or changes in interpretation of existing laws or regulations regarding data privacy and security
(together with applicable industry standards) may increase our costs of doing business. In this regard, we expect that there will
continue to be new laws, regulations and industry standards relating to privacy and data protection in the U.S., the E.U. and other
jurisdictions, such as the California Consumer Privacy Act of 2018 that will go into effect beginning January 1, 2020, which has been
characterized as the first “GDPR-like” privacy statute to be enacted in the U.S. because it mirrors a number of the key provisions in
the GDPR, and we cannot determine the impact such new laws, regulations and standards may have on our business.
We are also subject to the U.S. Foreign Corrupt Practices Act and anti-corruption laws, and similar laws with a significant anti-
corruption intent in foreign countries. In general, there is a worldwide trend to strengthen anticorruption laws and their enforcement.
Any violation of these laws by us or our agents or distributors could create a substantial liability for us, subject our officers and
directors to personal liability and also cause a loss of reputation in the market. We currently operate in many countries where the
public sector is perceived as being more or highly corrupt. Our strategic business plans include expanding our business in regions and
countries that are rated as higher risk for corruption activity, such as China, India and Russia. Becoming familiar with and
implementing the infrastructure necessary to comply with laws, rules and regulations applicable to new business activities and
mitigate and protect against corruption risks could be quite costly. In addition, failure by us or our agents or distributors to comply
with these laws, rules and regulations could delay our expansion into high-growth markets, could damage market perception of our
business and could adversely affect our existing business operations. Increased business in higher risk countries could also subject us
and our officers and directors to increased scrutiny and increased liability.
Further, the U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or
collectively, the ACA, among other things, amends the intent requirements of the federal Anti-Kickback Statute and certain criminal
statutes governing healthcare fraud. A person or entity can now be found guilty of violating the statute without actual knowledge of
the statute or specific intent to violate it. In addition, the ACA provides that the government may assert that a claim including items or
services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the
federal False Claims Act. Moreover, while we do not submit claims and our customers make the ultimate decision on how to submit
claims, from time-to-time, we may provide reimbursement guidance to our customers. If a government authority were to conclude that
we provided improper advice to our customers or encouraged the submission of false claims for reimbursement, we could face action
against us by government authorities. Any violations of these laws, or any action against us for violation of these laws, even if we
successfully defend against it, could result in a material adverse effect on our reputation, business, results of operations and financial
condition.
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Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available under such
laws, it is possible that some of our business activities, including our relationships with healthcare providers and entities, including,
but not limited to, hospitals, physicians, healthcare providers and our distributors, and certain sales and marketing practices, including
the provision of certain items and services to our customers, could be subject to challenge under one or more of such laws.
To enforce compliance with the healthcare regulatory laws, federal and state enforcement bodies have recently increased their scrutiny
of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions,
convictions and settlements in the healthcare industry. Responding to investigations can be time-and resource-consuming and can
divert management’s attention from the business. Additionally, as a result of these investigations, healthcare providers and entities
may have to agree to additional onerous compliance and reporting requirements as part of a consent decree or corporate integrity
agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business.
In addition, there has been a recent trend of increased U.S. federal, state and local regulation of payments and transfers of value
provided to healthcare professionals or entities. Section 6002 of the ACA, known as the Physician Payments Sunshine Act, imposes
annual reporting requirements on device manufacturers for payments and other transfers of value provided by them, directly or
indirectly, to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their family
members. A manufacturer’s failure to submit timely, accurately and completely the required information for all payments, transfers of
value or ownership or investment interests may result in significant civil monetary penalties. Manufacturers must submit reports to
CMS by the 90th day of each subsequent calendar year. Due to the difficulty in complying with the Physician Payments Sunshine Act,
we cannot assure you that we will successfully report all payments and transfers of value provided by us, and any failure to comply
could result in significant fines and penalties. Some states, such as California and Connecticut, also mandate implementation of
commercial compliance programs, and other states, such as Massachusetts and Vermont, impose restrictions on device manufacturer
marketing practices and tracking and reporting of gifts, compensation and other remuneration to healthcare professionals and entities.
The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with
different compliance and reporting requirements in multiple jurisdictions increase the possibility that we may fail to comply fully with
one or more of these requirements.
Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be
entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur
significant legal expenses and divert our management’s attention from the operation of our business.
Most of these laws apply to not only the actions taken by us, but also actions taken by our distributors or other third-party agents. We
have limited knowledge and control over the business practices of our distributors and agents, and we may face regulatory action
against us as a result of their actions which could have a material adverse effect on our reputation, business, results of operations and
financial condition.
In addition, the scope and enforcement of these laws is uncertain and subject to rapid change in the current environment of healthcare
reform, especially in light of the lack of applicable precedent and regulations. U.S. federal or state regulatory authorities might challenge
our current or future activities under these laws. Any such challenge could have a material adverse effect on our reputation, business,
results of operations and financial condition. Any U.S. federal or state or foreign regulatory review of us, regardless of the outcome,
would be costly and time-consuming. Additionally, we cannot predict the impact of any changes in these laws, whether or not retroactive.
Compliance with these and other changing regulations will increase our costs and may require increasing management attention.
Legislative, regulatory, or other healthcare reforms may make it more difficult and costly for us to obtain regulatory approval of
our products and to produce, market and distribute our products after approval is obtained.
Regulatory guidance and regulations are often revised or reinterpreted by the regulatory agencies in ways that may significantly affect
our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional
costs or lengthen review times of our products. Delays in receipt of, or failure to receive, regulatory approvals for our new products or
product configurations would have a material adverse effect on our business, results of operations and financial condition.
Federal and state governments in the U.S. have recently enacted legislation to overhaul the nation’s healthcare system. While the goal
of healthcare reform is to expand coverage to more individuals, it also involves increased government price controls, additional
regulatory mandates and other measures designed to constrain medical costs. The ACA significantly impacts the medical device
industry. Among other things, the ACA:
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established a Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical
effectiveness research in an effort to coordinate and develop such research; and
implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals,
physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through
bundled payment models.
Since its enactment, there have been judicial and Congressional challenges to numerous provisions of the ACA, as well as recent
efforts by the Trump administration to repeal or replace certain aspects of the ACA. Since January 2017, President Trump has signed
two Executive Orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise
circumvent some of the requirements for health insurance mandated by the ACA. Concurrently, Congress has considered legislation
that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, two
bills affecting the implementation of certain taxes under the ACA have been signed into law. The Tax Cuts and Jobs Act of 2017, or
the Tax Act, includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the
ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the
“individual mandate”. On January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018
that delayed the implementation of certain ACA-mandated fees, including delaying imposition of the medical device excise tax on
non-exempt medical devices through December 31, 2019. In July 2018, CMS published a final rule permitting further collections and
payments to and from certain ACA-qualified health plans and health insurance issuers under the ACA risk adjustment program in
response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. On
December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual
mandate” was repealed by Congress as part of the Tax Act. Additionally, on December 18, 2019, the U.S. Court of Appeals for the 5th
Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District
Court to determine whether the remaining provisions of the ACA are invalid as well. It is unclear how this decision, subsequent
decisions, subsequent appeals, and other efforts to repeal and replace the ACA will impact the ACA and our business. Any repeal and
replace legislation may have the effect of limiting the amounts that government agencies will pay for healthcare products and services,
which could result in reduced demand for our products or additional pricing pressure, or may lead to significant deregulation, which
could make the introduction of competing products and technologies much easier. Policy changes, including potential modification or
repeal of all or parts of the ACA or the implementation of new health care legislation could result in significant changes to the health
care system, which could have a material adverse effect on our business, results of operations and financial condition.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, President
Obama signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit
Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit
reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several
government programs. This includes reductions to Medicare payments to providers of 2% per fiscal year, which went into effect in
April 2013 and, due to subsequent legislative amendments to the statute, including the Bipartisan Budget Act of 2018, will stay in
effect through 2027, unless additional congressional action is taken. On January 2, 2013, President Obama signed into law the
American Taxpayer Relief Act of 2012 which, among other things, further reduced Medicare payments to several providers, including
hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five
years. More recently, there has been heightened governmental scrutiny in the U.S. to control the rising cost of healthcare. For
example, such scrutiny has resulted in several recent congressional inquiries and federal and state legislative activity designed to,
among other things, bring more transparency to pricing and reform government program reimbursement methodologies for
pharmaceutical products, some of which are included in the Trump administration’s “Blueprint to Lower Drug Prices and Reduce Out-
of-Pocket Costs” released in May 2018. State legislatures are also increasingly passing legislation and implementing regulations
designed to control the cost of healthcare, including price or patient reimbursement constraints, discounts, restrictions on certain
product access and marketing cost disclosure and transparency measures.
The Trump administration has publicly stated a core goal is to deregulate wherever possible. It is unclear if this contraction in
regulation would also apply to issued guidance documents that would impact our industry. Should the administration remove such
guidance documentation, market uptake for INTERCEPT platelets may be impaired. Conversely, any significant deregulation could
make the introduction of competing products and technologies much easier than the burden faced by us in order to receive FDA
approval. We expect that additional U.S federal and state and foreign healthcare reform measures will be adopted in the future, any of
which could limit the amounts that governments will pay for healthcare products and services, which could result in reduced demand
for our products or additional pricing pressure.
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Our platelet and plasma products and product candidates are not compatible with some collection, production and storage methods
or combinations thereof. Further, blood centers using INTERCEPT must have access to those certain devices, blood bags, assays
or platelet additive solutions that are compatible with our products.
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 U.S. and European
markets differ, among other characteristics, in their ability to collect platelets in reduced volumes of plasma. Platelet collection device
manufacturers may need to modify device collection parameters or software before a prospective customer could use INTERCEPT. If
these manufacturers are not cooperative or are resistant to assist their customers or do not assist with making such modifications, the
potential market for our products may be limited. 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 U.S. Our platelet system is designed
to work with platelets collected and stored in storage solutions, called InterSol and SSP+, and for platelets suspended in 100% plasma.
Fresenius is the exclusive manufacturer of InterSol and MacoPharma of SSP+, both widely-used PASs. Many of our customers and
prospective customers use InterSol or SSP+ in connection with INTERCEPT treatment. Similarly, some of our customers combine
multiple platelet or plasma components before treating the combined product with INTERCEPT. There are several third-party
manufacturers of pooling sets to allow for such combination. Our customers’ ability to use our INTERCEPT products may be
impaired should manufacturers of those products not provide access to their products allowing for the combination of multiple
components or if such manufacturers experience a shortage of their products or encounter defects with their products. In addition, we
do not yet know what impact, if any, the new MDR regulation may have on these suppliers or their products. Should manufacturers of
collection devices, compatible assays and blood bags, pooling sets or platelet additive solutions fail to obtain or maintain regulatory
approval, including the MDR, experience unexpected production disruption, or decide to cease distribution of those respective
products to customers and prospective customers, our ability to sell the INTERCEPT Blood System may be impaired and acceptance
in the marketplace could be harmed.
In order to address the entire market in the U.S., Japan, and potentially elsewhere, we will need to develop and test additional
configurations of the platelet system. For example, in the U.S., we understand a significant number of platelet concentrates are derived
from larger volumes collected from apheresis donors split into three therapeutic transfusable doses. Future configurations of the platelet
system will be needed to treat platelet donations with such processing parameters. We estimate that the majority of platelets used in the
U.S. are collected by apheresis, though a significant minority is prepared from pooled random donor platelets derived from whole blood
collections. In addition, many blood centers may view pooled random donor platelets treated with INTERCEPT as an economically
optimal approach. In order to gain regulatory approvals for a pathogen reduction system compatible with triple dose collections, and
random donor platelets, we will need to perform additional product development and testing, including additional clinical trials. We have
conducted and may conduct additional in vitro studies for our platelet system to potentially expand our label claims to include, among
others, platelets collected from pooled random donors, storage of INTERCEPT-treated platelets for up to seven days rather than five days,
and a new processing set for triple dose collections. In the U.S, our approved labels for the platelet system from the FDA limit our
current approvals to certain platelet collection platforms and a particular storage solution for the particular collection platform. For
instance, our approved claims permit apheresis collection of platelets on the Fresenius Amicus device while stored in an additive solution
or for apheresis collection of platelets collected on the Terumo Trima device and stored in 100% plasma. While we are seeking to
generate acceptable data for Amicus collected platelets stored in 100% plasma and Trima platelets stored in PAS, we cannot assure you
that the data will be acceptable to the FDA or that we will receive timely approval, if ever. We may be required to provide the FDA with
data for each permutation for which blood banking treatment practices exist which may be time consuming, costly and limit the potential
size of the U.S. market that can use our products. Our failure to obtain FDA and foreign regulatory approvals of any new configurations
could significantly limit product revenue from sales of the platelet system. In addition, given that there is some loss of platelets using our
product, blood centers may need to increase collection volumes in order to use our product and maintain an adequate concentration for a
triple therapeutic dose. In any event, delays in receipt or failure to receive approval could reduce our sales and negatively impact our
profitability potential and future growth prospects. 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. In addition, if the FDA or other regulatory or
accrediting body were to mandate safety interventions, including the option of pathogen reduction technology, when we had not received
approval for all operational configurations, the market to which we could sell our products may be limited until we obtain such approvals,
if ever, or may be permanently impaired if competing options are more broadly available. In addition, we will need to continue to
generate acceptable data in order to conform with the evolving collection practices such as automated whole-blood collection. If we are
unable to conform to evolving collection practices our ability to address those portions of the market may be compromised. These
development activities will increase our costs significantly and may not be successful. We may need to demonstrate the safety and
efficacy of our platelet system using a variety of configurations before our platelet system would be approved for such configurations.
Delays in obtaining any future approvals would adversely affect our ability to introduce new or enhanced products in a timely manner,
which in turn would harm our product revenue and potential future profitability.
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If our competitors develop products superior to ours, market their products more effectively than we market our products, or
receive regulatory approval before our products, our commercial opportunities could be reduced or eliminated.
We expect our products will continue 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, successfully receive and maintain
regulatory approvals, and adapt to 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 product 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 reduction 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 reduction systems. A number of companies are specifically focusing on
alternative strategies for pathogen reduction in platelets and plasma.
These alternative strategies may be more effective in reducing certain types of pathogens from blood products, including certain non-
lipid-enveloped viruses, such as hepatitis A and E viruses, which our products have not demonstrated an ability to inactivate, or
human parvovirus B-19, which is also a non-lipid-enveloped virus, for which our products have not demonstrated a high level of
inactivation. While studies have demonstrated that our products can effectively inactivate a broad spectrum of pathogens in blood
components, market adoption 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, more cost effective or easier to implement and incorporate into
existing blood processing procedures than INTERCEPT Blood System products. In Europe, several companies, including Grifols
S.A., Octapharma AG, MacoPharma International and Kedrion Biopharma, are developing or selling commercial pathogen reduction
systems or services to treat fresh frozen plasma.
MacoPharma has received CE Mark for a UVC-based product for pathogen reduced platelets. MacoPharma has recently completed a
Phase 3 clinical trial in Germany for expanded approvals. The data from this trial has not yet been made publicly available. In
addition, Terumo BCT, a subsidiary of Terumo Corporation, has developed a pathogen reduction system for blood products and has
been issued CE Marks for its system for both platelets and plasma. We further understand that Terumo BCT developed a pathogen
reduction system for whole blood and received a Class II CE Mark. MacoPharma or Terumo BCT’s products may offer competitive
advantages over our INTERCEPT Blood System. Terumo Corporation is 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 in Japan,
may be negatively affected by Terumo BCT’s resources and their pre-existing relationships with regulators and customers. Should
Terumo BCT’s product be approved for use and commercialized in Japan, our products would likely directly compete with their
products and we believe we would likely either need to establish operations in Japan or partner with a local Japanese company.
Octapharma AG received FDA approval in January 2013 to sell treated fresh frozen plasma for certain indications and is currently
commercially available. Should Octapharma enter into exclusive agreements with key customers, our plasma system may encounter
market resistance and we will have a more limited market into which we can sell.
In addition, we understand that Octapharma received approval to sell fresh frozen plasma in France. Octapharma’s entry into the
French market may pose a competitive threat to other pathogen reduced plasmas, including INTERCEPT and may in turn limit the
potential market available to us in France.
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
reduction and non-pathogen reduction products that we are unable to offer. Regulatory agencies may mandate use of competing
products which would limit our ability to sell our products in those markets.
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 as would a mandate of any competing technology other than INTERCEPT.
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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. We may be liable if any of our
products cause injury, illness or death. Although we will have completed 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 preclinical and clinical 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 reduction 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 or was a result of a potential defect or lack of efficacy of our
products. 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. In addition, should personnel at clinical study sites or
ultimately, potential customers, be harmed by amustaline, or believe they have been or could be harmed by amustaline, our insurance
coverage may be insufficient to provide coverage for any related potential liabilities. Amustaline is considered a potent chemical and
is the active compound of our red blood cell system.
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.
A recall of our products, either voluntarily or at the direction of the FDA or another governmental authority, or the discovery of
serious safety issues with our products that leads to corrective actions, could have a significant adverse impact on us.
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event
of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to
health. The FDA’s authority to require a recall must be based on an FDA finding that there is reasonable probability that the device
would cause serious injury or death. Manufacturers may also, under their own initiative, recall a product if any material deficiency in a
device is found or withdraw a product to improve device performance or for other reasons. The FDA requires that certain
classifications of recalls be reported to the FDA within ten working days after the recall is initiated. A government-mandated or
voluntary recall by us or one of our distributors could occur as a result of an unacceptable risk to health, component failures,
malfunctions, manufacturing errors, design or labeling defects or other deficiencies and issues. Regulatory agencies in other countries
have similar authority to recall devices because of material deficiencies or defects in design or manufacture that could endanger
health. Any recall would divert management attention and financial resources and could cause the price of our stock to decline, expose
us to product liability or other claims and harm our reputation with customers. Such events could impair our ability to supply our
products in a cost-effective and timely manner in order to meet our customers’ demands. Companies are required to maintain certain
records of recalls, even if they are not reportable to the FDA or similar foreign governmental authorities. We may initiate voluntary
recalls involving our products in the future that we determine do not require notification of the FDA or foreign governmental
authorities. If the FDA or foreign governmental authorities disagree with our determinations, they could require us to report those
actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition,
the FDA or a foreign governmental authority could take enforcement action for failing to report the recalls when they were conducted.
In addition, under the FDA’s medical device reporting regulations, we are required to report to the FDA any incident in which our
products may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction
were to recur, would likely cause or contribute to death or serious injury. Repeated product malfunctions may result in a voluntary or
involuntary product recall. We are also required to follow detailed recordkeeping requirements for all firm-initiated medical device
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corrections and removals, and to report such corrective and removal actions to FDA if they are carried out in response to a risk to
health and have not otherwise been reported under the medical device reporting regulations. If we do not adequately address problems
associated with our devices, we may face additional regulatory enforcement action, including FDA warning letters, product seizure,
injunctions, administrative penalties, or civil or criminal fines. We may also be required to bear other costs or take other actions that
may have a negative impact on our sales as well as face significant adverse publicity or regulatory consequences, which could harm
our business, including our ability to market our products in the future.
Any adverse event involving our products, whether in the U.S. or abroad could result in future voluntary corrective actions, such as
recalls or customer notifications, or agency action, such as inspection, mandatory recall or other enforcement action. Any corrective
action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and
capital, distract management from operating our business and may harm our reputation and financial results.
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, including in connection with the continuing U.S. commercial launch
of our platelet and plasma systems, costs to develop different configurations of existing products and new products, including our
illuminator, costs associated with planning, enrolling and completing ongoing studies, and the post-approval studies we are required to
conduct in connection with the FDA approval of the platelet system, costs associated with pursuing potential regulatory approvals in
other geographies where we do not currently sell our platelet and plasma systems, costs associated with conducting in vitro studies and
clinical development of our red blood cell system in Europe and the U.S., costs associated with performing the agreed-upon activities
under our BARDA agreement, and costs related to creating, maintaining and defending our intellectual property. Our long-term capital
requirements will also be dependent on the success of our sales efforts, competitive developments, the timing, costs and magnitude of
our longer-term clinical trials and other development activities, required post-approval studies, market preparedness and product
launch activities for any of our product candidates and products in geographies where we do not currently sell our products, and
regulatory factors. Until we are able to generate a sufficient amount of product revenue and generate positive net cash flows from
operations, which we may never do, meeting our long-term capital requirements is in large part reliant on continued access to funds
under our BARDA agreement and the public and private equity and debt capital markets, as well as on collaborative arrangements
with partners, augmented by cash generated from operations and interest income earned on the investment of our cash balances. While
we believe that our available cash and cash equivalents and short-term investments, as well as cash received from product sales and
under our agreement with BARDA, will be sufficient to meet our capital requirements for at least the next twelve months, if we are
unable to generate sufficient product revenue, or access sufficient funds under our BARDA agreement or the public and private equity
and debt capital markets, we may be unable to execute successfully on our operating plan. We have based our cash sufficiency
estimate on assumptions that may prove to be incorrect. If our assumptions prove to be incorrect, we could consume our available
capital resources sooner than we currently expect or in excess of amounts than we currently expect, which could adversely affect our
commercialization and clinical development activities.
We have borrowed and in the future may borrow additional capital from institutional and commercial banking sources to fund future
growth, including pursuant to our Credit, Security and Guaranty Agreement (Term Loan), or the Term Loan Credit Agreement, and
our Credit, Security and Guaranty Agreement (Revolving Loan), or the Revolving Loan Credit Agreement, both with MidCap
Financial Trust, or MidCap, as described below, or potentially pursuant to new arrangements with different lenders. We may borrow
funds on terms that may include restrictive covenants, including covenants that restrict the operation of our business, liens on assets,
high effective interest rates, financial performance covenants and repayment provisions that reduce cash resources and limit future
access to capital markets. In addition, we expect to continue to opportunistically seek access to the equity capital markets to support
our development efforts and operations. To the extent 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 our technologies or rights to market and sell our products in certain geographies,
grant licenses on terms that are not favorable to us, or issue equity that may be substantially dilutive to our stockholders.
While we expect to receive significant funding under our five-year agreement with BARDA, our ability to obtain the funding we
expect to receive under the agreement is subject to various risks and uncertainties, including with respect to BARDA’s ability to
terminate the agreement for convenience at any time and our ability to achieve the required milestones under the agreement. In
addition, access to federal contracts is subject to the authorization of funds and approval of our research plans by various organizations
within the federal government, including the U.S. Congress. The general economic environment, coupled with tight federal budgets,
has led to a general decline in the amount available for government funding. If BARDA were to eliminate, reduce or delay funding
under our agreement, this would have a significant negative impact on the programs associated with such funding and could have a
significant negative impact on our revenues and cash flows. In addition, if we are unable to generate sufficient perquisite Phase 3
clinical data and/or reach agreement with the FDA on an additional Phase 3 clinical trial for chronic anemia in the U.S. for our red
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blood cell system, our agreement with BARDA will be severely limited in scope or could be terminated altogether, and our ability to
complete the development activities required for licensure in the U.S. may require additional capital beyond which we currently have.
If alternative sources of funding are not available, we may be forced to suspend or terminate development activities related to the red
blood cell system in the U.S.
As a result of economic conditions, general global economic uncertainty, political change, 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 the volatile global financial markets, general economic uncertainty or other factors,
we may need to curtail planned development or commercialization activities. In addition, we may need to obtain additional funds to
complete development activities for the red blood cell system if additional studies are necessary for regulatory approval in Europe,
which would increase our costs and potentially delay the approval. We may need to obtain additional funding to conduct additional
randomized controlled clinical trials for existing or new products, particularly if we are unable to access any additional portions of the
funding contemplated by our BARDA agreement, and we may choose to defer such activities until we can obtain sufficient additional
funding or, at such time, our existing operations provide sufficient cash flow to conduct these trials.
Covenants in our Term Loan Credit Agreement and Revolving Loan Credit Agreement restrict our business and operations in
many ways and if we do not effectively manage our covenants, our financial conditions and results of operations could be
adversely affected. In addition, our operations may not provide sufficient cash to meet the repayment obligations of our debt
incurred under the Term Loan Credit Agreement.
As of December 31, 2019, our total indebtedness under our Term Loan Credit Agreement and Revolving Loan Credit Agreement was
approximately $44.4 million. All of our current and future assets, except for intellectual property and 35% of our investment in our
subsidiary, Cerus Europe B.V., are secured for our borrowings under the Term Loan Credit Agreement and Revolving Loan Credit
Agreement. The Term Loan Credit Agreement and Revolving Loan Credit Agreement require that we comply with certain covenants
applicable to us and our subsidiary, including among other things, covenants restricting dispositions, changes in business,
management, ownership or business locations, mergers or acquisitions, indebtedness, encumbrances, distributions, investments,
transactions with affiliates and subordinated debt, any of which could restrict our business and operations, particularly our ability to
respond to changes in our business or to take specified actions to take advantage of certain business opportunities that may be
presented to us. In addition, receipt of a qualified audit opinion (other than as to going concern or a qualification resulting solely from
the scheduled maturity of term loans occurring within one year from the date such opinion is delivered) would be a violation of an
affirmative covenant under the Term Loan Credit Agreement. While we believe that our available cash and cash equivalents and short-
term investments, as well as cash to be received from product sales and under our agreement with BARDA, will be sufficient to meet our
capital requirements for at least the next twelve months, if we are unable to generate sufficient product revenue, or access sufficient
funds under our BARDA agreement or the public and private equity and debt capital markets, we may be unable to execute
successfully on our operating plan. Our failure to comply with any of the covenants could result in a default under the Term Loan
Credit Agreement or the Revolving Loan Credit Agreement, which could permit the lenders to declare all or part of any outstanding
borrowings to be immediately due and payable, or to refuse to permit additional borrowings under the Term Loan Credit Agreement
or the Revolving Loan Credit Agreement. If we are unable to repay those amounts, the lenders under the Term Loan Credit Agreement
or the Revolving Loan Credit Agreement could proceed against the collateral granted to them to secure that debt, which would
seriously harm our business. In addition, should we be unable to comply with these or certain other covenants or if we default on any
portion of our outstanding borrowings, the lenders can also impose an exit fee of a percentage of the amount borrowed pursuant to the
Term Loan Credit Agreement.
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 portion 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 ability to conduct business.
Significant disruptions of information technology systems or breaches of data security could adversely affect our business.
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Our business is increasingly dependent on complex and interdependent information technology systems, including internet-based
systems, databases and programs, to support our business processes as well as internal and external communications. As use of
information technology systems has increased, deliberate attacks and attempts to gain unauthorized access to computer systems and
networks have increased in frequency and sophistication. Our information technology, systems and networks are potentially
vulnerable to breakdown, malicious intrusion and computer viruses which may result in the impairment of production and key
business processes or loss of data or information. We are also potentially vulnerable to data security breaches—whether by employees
or others—which may expose sensitive data to unauthorized persons. For example, we have in the past and may in the future be
subject to “phishing” attacks in which third parties send emails purporting to be from reputable sources. Phishing attacks may attempt
to obtain personal information, infiltrate our systems to initiate wire transfers or otherwise obtain proprietary or confidential
information. Although we have not experienced any losses as a result of such attacks or any other breaches of data security, such
breaches could lead to the loss of trade secrets or other intellectual property, or could lead to the public exposure of personal
information (including sensitive personal information) of our employees, clinical trial patients, distributors, customers and others.
Breaches and other inappropriate access can be difficult to detect and any delay in identifying them could increase their harm. While
we have implemented security measures to protect our data security and information technology systems, such measures may not
prevent such events. Any such breaches of security and inappropriate access could disrupt our operations, harm our reputation or
otherwise have a material adverse effect on our business, financial condition and results of operations.
If we fail to attract, retain and motivate key personnel or to retain the members of our executive management team, our operations
and our future growth may be adversely affected.
We are highly dependent upon our executive management team and other critical personnel, including our specialized research and
development, regulatory and operations personnel, many of whom have been employed with us for many years and have a significant
amount of institutional knowledge about us and our products. We do not carry “key person” insurance. If one or more members of our
executive management team or other key personnel were to retire or resign, our ability to achieve development, regulatory or
operational milestones for commercialization of our products could be adversely affected if we are unable to replace them with
employees of comparable knowledge and experience. In addition, we may not be able to retain or recruit other qualified individuals,
and our efforts at knowledge transfer could be inadequate. If knowledge transfer, recruiting and retention efforts are inadequate,
significant amounts of internal historical knowledge and expertise could become unavailable to us.
We also rely on our ability to attract, retain and motivate skilled and highly qualified personnel in order to grow our company.
Competition for qualified personnel in the medical device and pharmaceutical industry is very intense. If we are unable to attract,
retain and motivate quality individuals, our business, financial condition, ability to perform under our BARDA agreement, or results
of operations and growth prospects could be adversely affected. Even if we are able to identify and hire qualified personnel
commensurate with our growth objectives and opportunities, the process of integrating new employees is time consuming, costly and
distracting to existing employees and management. Such disruptions may have an adverse impact on our operations, our ability to
service existing markets and customers, or our ability to comply with regulations and laws.
All of the employees of our subsidiary, Cerus Europe B.V., are employed outside the U.S., including in France, where labor and
employment laws are relatively stringent and, in many cases, grant significant job protection to certain employees, including rights on
termination of employment. In addition, one of our manufacturing partners that we are dependent on is located in France and may
have employees that are members of unions or represented by a works council as required by law. These more stringent labor and
employment laws to the extent that they are applicable, coupled with the requirement to consult with the relevant unions or works’
councils, could increase our operational costs with respect to our own employees and could result in passed through operational costs
by our manufacturing partner. If the increased operational costs become significant, our business, financial condition and results of
operations could be adversely impacted.
Our ability to use our net operating loss carryforwards and certain other tax attributes is uncertain and may be limited.
Our ability to use our federal and state net operating loss, or NOL, carryforwards to offset potential future taxable income and related
income taxes that would otherwise be due is dependent upon our generation of future taxable income before the expiration dates of the
NOL carryforwards, and we cannot predict with certainty when, or whether, we will generate sufficient taxable income to use all of
our NOL carryforwards. Under the Tax Act, federal net operating losses incurred in 2018 and in future years may be carried forward
indefinitely, but the deductibility of such federal net operating losses is limited. It is uncertain if and to what extent various states will
conform to the Tax Act. In addition, utilization of NOL carryforwards to offset potential future taxable income and reduce income
taxes that would otherwise be due is subject to annual limitations under the “ownership change” provisions of Section 382 of the
Internal Revenue Code of 1986, as amended, or the Code, and similar state provisions, which may result in the expiration of NOL
carryforwards before future utilization. In general, under Sections 382 and 383 of the Code, if a corporation undergoes an “ownership
change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s
ability to use its pre-change NOL carryforwards and other pre-change tax attributes (such as research and development credit
carryforwards) to offset its post-change taxable income or taxes may be limited. Our equity offerings and other changes in our stock
ownership, some of which are outside of our control, may have resulted or could in the future result in an ownership change. Although
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we have completed studies to provide reasonable assurance that an ownership change limitation would not apply, we cannot be certain
that a taxing authority would reach the same conclusion. If, after a review or audit, an ownership change limitation were to apply,
utilization of our domestic NOL and tax credit carryforwards could be limited in future periods and a portion of the carryforwards
could expire before being utilized to reduce future income tax liabilities. In addition, at the state level, there may be periods during
which the use of net operating loss carryforwards is suspended or otherwise limited, which could accelerate or permanently increase
state taxes owed.
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:
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•
•
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, we are aware of a
recently expired U.S. patent issued to a third-party that covers methods to remove psoralen compounds from blood products. We have
reviewed the patent and believe there exist 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. In this regard, whether or not we have infringed
this patent will not be known with certainty unless and until a court interprets the patent in the context of litigation. In the event that
we are found to have infringed any valid claim of this patent, we may, among other things, be required to pay damages. Our patents
expire at various dates between 2019 and 2031. Recent patent applications will, if granted, result in patents with later expiration dates.
In addition, we have a license from Fresenius to U.S. and foreign patents relating to the INTERCEPT Blood System, which expire at
various dates between 2019 and 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, including in connection with our
planned commercialization of the platelet and plasma systems in the U.S. 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. Further, the laws of some foreign
countries may not protect intellectual property rights to the same extent as the laws of the U.S., including the CIS countries, China and
India, jurisdictions where we are currently expanding our commercialization efforts through distributors. In certain countries,
compulsory licensing laws exist that may be used to compel a patent owner to grant licenses to third parties, for reasons such as non-
use of the patented subject matter within a certain period of time after patent grant or commercializing in a manner that is cost-
prohibitive in the country. In those countries, we may have limited remedies if our patents are infringed or if we are compelled to
grant a license for INTERCEPT to a third-party, which could materially diminish the value of such patents. This could adversely
impact our potential product revenue opportunities.
We may face litigation requiring us 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 U.S. 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. 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
49
confidentiality agreements with employees, consultants and 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 U.S. dollar and
foreign currencies, as well as to tariffs and other trade restrictions.
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 the INTERCEPT Blood System sold outside of the U.S. are typically invoiced to customers in Euros. In addition, we
purchase finished INTERCEPT 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
cash payments for expenses to support our international operations. Foreign exchange rate fluctuations are recorded as a component of
other income, net on our consolidated statements of operations. Significant fluctuations in the volatility of foreign currencies relative
to the U.S. dollar may materially affect our results of operations. For example, the announcement of Brexit caused severe volatility in
global currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we
transact business. Should this foreign exchange volatility continue or increase, it could cause volatility in our results of operations. In
addition, in a period where the U.S. dollar is strengthening/weakening as compared to Euros and other currencies we transact in, our
product revenues and expenses denominated in Euros or other foreign currencies are translated into U.S. dollars at a lower/higher
value than they would be in an otherwise constant currency exchange rate environment.
Currently we do not have a formal hedging program to mitigate the effects of foreign currency volatility. As our commercial
operations grow globally, our operations are exposed to more currencies and as a result our exposure to foreign exchange risk will
grow.
Additionally, the Trump administration has called for substantial changes to foreign trade policy and has recently imposed tariffs on
certain U.S. imports. Canada, the E.U., China and other countries have responded with retaliatory tariffs on certain U.S. exports. We
also rely on various U.S. corporate tax provisions related to international commerce. If we are subject to new regulations, including
those under the Tax Act, or if restrictions and tariffs increase our operating costs in the future, and we are not able to recapture those
costs from our customers, or if such initiatives, regulations, restrictions or tariffs make it more difficult for us to compete in overseas
markets, our business, financial condition and results of operations could be adversely impacted.
If the London Inter-Bank Offered Rate, or LIBOR, is discontinued, interest payments under our Term Loan Credit Agreement or
Revolving Loan Credit Agreement may be calculated using another reference rate.
In July 2017, the Chief Executive of the U.K. Financial Conduct Authority, or FCA, which regulates LIBOR, announced that the FCA
intends to phase out the use of LIBOR by the end of 2021. In addition, the U.S. Federal Reserve, in conjunction with the Alternative
Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar
LIBOR with the Secured Overnight Financing Rate, or SOFR, a new index calculated by short-term repurchase agreements, backed by
Treasury securities. Although there have been certain issuances utilizing SOFR, it is unknown whether this or any other alternative
reference rate will attain market acceptance as a replacement for LIBOR. U.S. dollar LIBOR is used as a benchmark rate in our Term
Loan Credit Agreement and Revolving Loan Credit Agreement. There remains uncertainty regarding the future utilization of LIBOR
and the nature of any replacement rate, and any potential effects of the transition away from LIBOR on us are not known. The
transition process may involve, among other things, increased volatility and illiquidity in markets for instruments that currently rely on
LIBOR and may result in increased borrowing costs, the effectiveness of related transactions such as hedges, uncertainty under
applicable documentation, including our Term Loan Credit Agreement and Revolving Loan Credit Agreement, or difficult and costly
processes to amend such documentation. As a result, our ability to refinance our Term Loan Credit Agreement, Revolving Loan Credit
Agreement or other indebtedness or to hedge our exposure to floating rate instruments may be impaired, which would adversely affect
the operations of our business.
We currently have a limited trading volume, which results in higher price volatility for, and reduced liquidity of, our common
stock.
Our shares of common stock are currently quoted on the Nasdaq Global Market under the symbol “CERS.” The market for our
common stock has been limited due to low trading volume and the small number of brokerage firms acting as market makers. Active
trading markets generally result in lower price volatility and more efficient execution of buy and sell orders. The absence of an active
50
trading market increases price volatility and reduces the liquidity of our common stock. As long as this condition continues, the sale of
a significant number of shares of common stock at any particular time could be difficult to achieve at the market prices prevailing
immediately before such shares are offered, which may limit our ability to effectively raise money. In addition, due to the limitations
of our market and the volatility in the market price of our stock, investors may face difficulties in selling shares at attractive prices
when they want to sell. As a result of this lack of trading activity, the quoted price for our common stock is not necessarily a reliable
indicator of its fair market value.
We are obligated to develop and maintain proper and effective internal control over financial reporting. In the future, we may not
complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be
determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our
common stock.
We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the
effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weakness identified
by our management in our internal control over financial reporting, as well as a statement that our independent registered public
accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting.
Complying with Section 404 requires a rigorous compliance program as well as adequate time and resources. As a result of expanding
our commercialization efforts, developing, improving and expanding our core information technology systems as well as
implementing new systems to support our sales, supply chain activities and reporting capabilities, all of which require significant
management time and support, we may not be able to complete our internal control evaluation, testing and any required remediation in
a timely fashion. Additionally, if we identify one or more material weaknesses in our internal control over financial reporting, we will
not be unable to assert that our internal controls are effective. Should our internal controls be deemed ineffective, our ability to obtain
additional financing, or obtain additional financing on favorable terms, could be materially and adversely affected which, in turn,
could materially and adversely affect our business, our financial condition and the value of our common stock. If we are unable to
assert that our internal control over financial reporting is effective in the future, or if our independent registered public accounting firm
is unable to express an opinion or expresses an adverse opinion on the effectiveness of our internal controls in the future, investor
confidence in the accuracy and completeness of our financial reports could be further eroded, which would have a material adverse
effect on the price of our common stock.
Provisions of our charter documents, our stockholder rights plan, our compensatory arrangements 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 us and an “interested stockholder”. 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.
In addition, our executive employment agreements, change of control severance benefit plan and equity incentive plans and
agreements thereunder provide for certain severance benefits in connection with a change of control of us, including single-trigger
equity vesting acceleration benefits with respect to outstanding stock options, which could increase the costs to a third-party acquirer
and/or deter such third-party from acquiring us.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
Our corporate headquarters, which includes our principal executive offices, is located in Concord, California. We lease this facility,
which includes 84,631 square feet and includes laboratory space for blood safety research and supports general administrative,
51
marketing and technical support functions. We also lease a facility in Amersfoort, the Netherlands, which is used for selling and
administrative functions. We believe that our current and future facilities will be adequate for the foreseeable future.
Item 3.
Legal Proceedings
None.
Item 4.
Mine Safety Disclosures
Not applicable.
52
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the Nasdaq Global Market under the symbol “CERS”.
On February 10, 2020, we had 135 holders of record of our common stock.
Dividends
We have not declared or paid dividends on our common stock and do not intend to pay cash dividends on our common stock in the
foreseeable future.
Stock Performance Graph (1)
The following graph shows the total stockholder return of an investment of $100 in cash (and the reinvestment of any dividends
thereafter) on December 31, 2014, and tracked the performance through December 31, 2019, for (i) our common stock, (ii) the Nasdaq
Biotechnology Index, and (iii) the Nasdaq Stock Market (United States) Index. Our stock price performance shown in the graph below is
based upon historical data and is not indicative of future stock price performance.
Comparison of 5-year Cumulative Total Return on Investment
200
100
0
2014
2015
2016
2017
2018
2019
Cerus
Nasdaq Biotech Index
Nasdaq
Cerus Corporation ....................... $
Nasdaq Biotech Index..................
Nasdaq .........................................
100.00 $
100.00
100.00
101.28 $
111.42
105.73
69.71 $
87.26
113.66
54.17 $
105.64
145.76
81.25 $
95.79
140.10
67.63
119.17
189.45
2014
2015
2016
2017
2018
2019
December 31,
(1)
The graph and the other information furnished in this section is not “soliciting material,” is not deemed “filed” with the SEC and
is not to be incorporated by references to any filing of Cerus Corporation under the Securities Act of 1933 or the Securities Act
of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in such filing.
53
Item 6.
Selected Financial Data
The following table summarizes certain selected financial data for the five years ended December 31, 2019, which has been derived
from audited consolidated financial statements. The information presented below may not be indicative of future results and should be
read in conjunction with “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the
consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
(in thousands, except per share amounts)
Consolidated Statements of Operations Data:
Product revenue...................................................................... $
Cost of product revenue .........................................................
Gross profit on product revenue .......................................
Government contract revenue ................................................
Loss from operations ..............................................................
Net loss...................................................................................
2019
Year Ended December 31,
2017
2016
2018
74,649 $
33,419
41,230
19,125
(66,226)
(71,244)
60,908 $
31,634
29,274
15,143
(54,988)
(57,564)
43,568 $
22,531
21,037
7,758
(57,530)
(60,585)
37,183 $
20,295
16,888
2,092
(61,447)
(62,906)
2015
34,223
23,464
10,759
—
(61,075)
(55,868)
Net loss per share:
Basic.................................................................................. $
Diluted .............................................................................. $
(0.51) $
(0.51) $
(0.44) $
(0.44) $
(0.56) $
(0.56) $
(0.62) $
(0.62) $
(0.58)
(0.61)
Weighted average shares outstanding used for calculating
loss per share:
Basic..................................................................................
Diluted ..............................................................................
139,831
139,831
131,663
131,663
108,221
108,221
101,826
101,826
96,068
96,905
(in thousands)
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term investments ............... $
Working capital ......................................................................
Total assets .............................................................................
Long-term obligations ............................................................
Total stockholders' equity.......................................................
2019
2018
December 31,
2017
2016
2015
85,718 $
77,772
165,535
58,147
57,052
117,577 $
94,224
163,460
26,263
84,519
60,696 $
66,767
98,244
36,173
38,940
71,628 $
67,217
103,476
18,801
57,787
107,879
108,544
139,402
22,775
94,765
54
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis should be read in conjunction with our audited consolidated financial statements and the accompanying
notes thereto included in this Annual Report on Form 10-K for the year ended December 31, 2019. Operating results for the year
ended December 31, 2019 are not necessarily indicative of results that may occur in future periods.
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 System. The INTERCEPT Blood System is designed for three blood
components: platelets, plasma and red blood cells. The INTERCEPT Blood System for platelets, or platelet system, and the
INTERCEPT Blood System for plasma, or plasma system, have received CE Marks and U.S. Food and Drug Administration, or FDA,
approval and are being marketed and sold in a number of countries around the world. We sell both the platelet and plasma systems
using our direct sales force and through distributors.
The platelet system is approved in the U.S. for ex vivo preparation of pathogen-reduced apheresis platelet components collected and
stored in 100% plasma or InterSol in order to reduce the risk of transfusion-transmitted infection, or TTI, including sepsis, and as an
alternative to gamma irradiation for prevention of transfusion-associated graft versus host disease or TA-GVHD. As part of the FDA’s
approval of the platelet system, we are required to successfully conduct and complete two post-approval studies - a haemovigilance
study to evaluate the incidence of acute lung injury following transfusion of INTERCEPT-treated platelets; and a recovery study of
platelets treated with the platelet system that is currently being discussed with FDA. The plasma system is approved in the U.S. for ex
vivo preparation of pathogen-reduced, whole blood derived or apheresis plasma in order to reduce the risk of TTI when treating
patients requiring therapeutic plasma transfusion, and as an alternative to gamma irradiation for prevention of TA-GVHD.
The INTERCEPT Blood System for red blood cells, or the red blood cell system, is currently in development and has not been
commercialized anywhere in the world. We announced the successful completion of our European Phase 3 clinical trial of our red
blood cell system for acute anemia patients in January 2015, and in January 2018, we reported that the primary efficacy and safety
endpoints were successfully achieved in our European Phase 3 clinical trial for chronic anemia patients. Based on the results of those
trials, we filed for CE Mark approval in the European Union in December 2018, though we now know that we will have to transition
from the Medical Device Directive, or MDD, to the Medical Device Regulation, or MDR, and do not expect an approval decision until
2022, if ever. We do not yet know whether the data generated from our European Phase 3 clinical trials will be sufficient to receive
CE Mark approval. In the U.S., we successfully completed a Phase 2 recovery and lifespan study in 2014. In 2017, we initiated a
Phase 3 clinical, double-blind study, known as the RedeS study, to assess the safety and efficacy of INTERCEPT-treated red blood
cells when compared to conventional, un-treated, red blood cells in regions impacted by the Zika virus epidemic. Also in 2017, we
received investigational device exemption, or IDE, approval from the FDA to initiate a Phase 3 clinical trial, known as the ReCePI
study that is designed to evaluate the efficacy and safety of INTERCEPT-treated red blood cells in patients requiring transfusion for
acute blood loss during surgery. In addition to successfully conducting and completing the RedeS and ReCePI studies, we will need to
successfully conduct and complete an additional Phase 3 clinical trial for chronic anemia patients, including sickle-cell anemia
patients, in the U.S. before the FDA will consider our red blood cell system for approval. We also understand that one or more
additional in vitro studies will be required to be successfully completed and submitted to the FDA, prior to any initiation of a potential
additional Phase 3 clinical trial. There can be no assurance that we will be able to successfully complete any such in vitro studies, nor
can there be any assurance that we and the FDA will agree to any trial protocol we propose or that we will otherwise obtain FDA
clearance to initiate a potential additional Phase 3 clinical trial. In part, we will seek to introduce supplemental clinical data we
obtained from European clinical trials, though we cannot assure you that we will be able to demonstrate comparability or that the FDA
will allow supplemental clinical European data. In addition, given the need to phenotypically match donations and patients and the
existing burden of managing the production and supply to sickle-cell anemia patients, donor recruitment in a potential additional
Phase 3 clinical trial may be difficult or impractical, which could significantly delay or preclude our ability to obtain any FDA
approval of our red blood cell system. Although we filed for CE Mark under the MDD for the red blood cell system, we understand
that we will need to submit additional data from qualified suppliers which we will not have prior to needing to refile under the MDR,
and therefore, we do not expect to receive any regulatory approvals of our red blood cell system prior to 2022, if ever. We must
demonstrate an ability to define, test and meet acceptable specifications for our current Good Manufacturing Practice manufactured
compounds used to prepare INTERCEPT-treated red blood cells before we can submit and seek regulatory approval of our red blood
cell system. We understand that while the data generated from our European Phase 3 clinical trials may be sufficient to receive CE
Mark approval, we may need to generate additional safety data from commercial use in order to achieve broad market acceptance. In
addition, these trials may need to be supplemented by additional, successful Phase 3 clinical trials for approval in certain countries. If
such additional Phase 3 clinical trials are required, they would likely need to demonstrate equivalency of INTERCEPT-treated red
blood cells compared to conventional, un-treated red blood cells and the significantly lower lifespan for INTERCEPT-treated red
blood cells compared to conventional, un-treated red blood cells may limit our ability to obtain any regulatory approvals in certain
countries for the red blood cell system. As part of our development activities, we will need to successfully complete a number of in
vitro studies prior to receiving any regulatory approvals in Europe and certain additional activities, including successfully completing
55
the RedeS and ReCePI studies and an additional Phase 3 clinical trial for chronic anemia patients, including sickle-cell anemia
patients, in the U.S., prior to receiving any regulatory approvals in the U.S. Successful completion of these activities may require
capital beyond that which we currently have or that may be available to us under our agreement with the Biomedical Advanced
Research and Development Authority, or BARDA, and we may be required to obtain additional capital in order to complete the
development of and obtain any regulatory approvals for the red blood cell system. In addition, if we are unable to obtain from our
suppliers sufficient clinical quantities of the active compounds for our red blood cell system meeting defined quality and regulatory
specifications or if our suppliers are not able to maintain regulatory compliance, we may experience delays in testing, conducting trials
or obtaining approvals, and our product development costs would likely increase.
In 2016, we entered into a five-year agreement with BARDA, part of the U.S. Department of Health and Human Services’ Office of
the Assistant Secretary for Preparedness and Response, to receive funding from BARDA to support the development of our red blood
cell system, including clinical and regulatory development programs in support of potential licensure, and development,
manufacturing and scale-up activities, as well as activities related to broader implementation of all three INTERCEPT systems in
areas of Zika virus risk. The RedeS and ReCePI studies are being funded as part of our agreement with BARDA. Under the contract,
BARDA reimburses us for allowable direct contract costs, as such costs are incurred, and for allowable indirect costs. See the
discussion under “BARDA” below for more information.
Our near-term capital requirements are dependent on various factors, including operating costs and working capital investments
associated with developing and commercializing the INTERCEPT Blood System, including in connection with continuing U.S.
commercialization of our platelet and plasma systems, costs to develop different configurations of existing products and new products,
including our illuminator, costs associated with planning, enrolling and completing ongoing studies, and the post-approval studies we
are required to conduct in connection with the FDA approval of the platelet system, costs associated with pursuing potential regulatory
approvals in other geographies where we do not currently sell our platelet and plasma systems, costs associated with conducting in
vitro studies and clinical development of our red blood cell system in Europe and the U.S., costs associated with performing the
agreed-upon activities under our BARDA agreement, and costs related to creating, maintaining and defending our intellectual
property. Our long-term capital requirements will also be dependent on the success of our sales efforts, competitive developments, the
timing, costs and magnitude of our longer-term clinical trials and other development activities, required post-approval studies, market
preparedness and product launch activities for any of our product candidates and products in geographies where we do not currently
sell our products, and regulatory factors. Until we are able to generate a sufficient amount of product revenue and generate positive net
cash flows from operations, which we may never do, meeting our long-term capital requirements is in large part reliant on continued
access to funds under our BARDA agreement and the public and private equity and debt capital markets, as well as on collaborative
arrangements with partners, augmented by cash generated from operations and interest income earned on the investment of our cash
balances. While we believe that our available cash and cash equivalents and short-term investments, as well as cash received from
product sales and under our agreement with BARDA, will be sufficient to meet our capital requirements for at least the next twelve
months, if we are unable to generate sufficient product revenue, or access sufficient funds under our BARDA agreement or the public
and private equity and debt capital markets, we may be unable to execute successfully on our operating plan. We have based our cash
sufficiency estimate on assumptions that may prove to be incorrect. If our assumptions prove to be incorrect, we could consume our
available capital resources sooner than we currently expect or in excess of amounts than we currently expect, which could adversely
affect our commercialization and clinical development activities.
We have borrowed and in the future may borrow additional capital from institutional and commercial banking sources to fund future
growth, including pursuant to our term loan agreement and revolving loan agreement with MidCap Financial Trust, or MidCap, as
described below, or potentially pursuant to new arrangements with different lenders. We may borrow funds on terms that may include
restrictive covenants, including covenants that restrict the operation of our business, liens on assets, high effective interest rates,
financial performance covenants and repayment provisions that reduce cash resources and limit future access to capital markets. In
addition, we expect to continue to opportunistically seek access to the equity capital markets to support our development efforts and
operations. To the extent 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 our technologies or rights to market and sell our products in certain geographies, grant licenses on
terms that are not favorable to us, or issue equity that may be substantially dilutive to our stockholders.
As a result of economic conditions, general global economic uncertainty, political change, 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 the volatile global financial markets, general economic uncertainty or other factors,
we may need to curtail planned development or commercialization activities. In addition, we may need to obtain additional funds to
complete development activities for the red blood cell system necessary for potential regulatory approval in Europe, if costs are higher
than anticipated or we encounter delays. We may need to obtain additional funding to conduct additional randomized controlled
clinical trials for existing or new products, particularly if we are unable to access any additional portions of the funding contemplated
56
by our BARDA agreement, and we may choose to defer such activities until we can obtain sufficient additional funding or, at such
time our existing operations provide sufficient cash flow to conduct these trials.
Although we received FDA approval of our platelet and plasma systems in December 2014, our U.S. commercial efforts in 2019 have
been largely focused on enabling blood centers that are using INTERCEPT to optimize production and increase the number of platelet
and plasma units produced and made available to patients and continuing to develop awareness of INTERCEPT’s product profile
relative to other platelet and plasma products, including conventional, un-treated components. Significant increase in product revenue
from customers in the U.S. may not occur, if at all, until we have been able to successfully implement the platelet and plasma systems
and demonstrate that they are economical, safe and efficacious for potential customers. In addition, to address the entire market in the
U.S., we will need to develop, test and obtain FDA approval of additional configurations of the platelet system. In September 2019,
the FDA issued a final guidance document, “Bacterial Risk Control Strategies for Blood Collection Establishments and Transfusion
Services to Enhance the Safety and Availability of Platelets for Transfusion.” The guidance document requires all blood collection
facilities to comply with the options available under the guidance document, which includes the INTERCEPT Blood System, for all
platelet collections, no later than eighteen months from the issuance date. Blood centers may wait until later in the compliance grace
period before beginning to take steps to implement INTERCEPT. Should a large number of blood centers wait, we may not have
sufficient resources or product available to allow customers to timely and successfully implement INTERCEPT before the end of the
compliance grace period. Should we be unable to manufacture INTERCEPT in sufficient quantities in a timely manner, or have
adequate resources to assist customer with implementing the INTERCEPT Blood System, U.S. blood centers may be forced to use
alternate options allowed by the guidance document, which could permanently impact our ability to convert those blood centers to
INTERCEPT users. We also plan to perform in vitro studies and seek a premarket approval, or PMA, supplement to use our plasma
system to produce extended-storage cryoprecipitate and possibly other plasma derived biological products. We currently have
agreements with certain blood center manufacturing partners and are actively working to identify additional partners to manufacture
the extended-storage cryoprecipitate. We are also working on implementing the infrastructure we believe will be necessary to market
an approved extended-storage cryoprecipitate product directly to hospitals subsequent to potential regulatory approval of any PMA
supplement that we may propose to submit to the FDA. Even if we were to receive approval for a PMA supplement for extended-
storage cryoprecipitate, we may not receive label claims for all indications or for indications with the highest unmet need or market
acceptance.
Outside of the U.S., we recognize product revenues from the sale of our platelet and plasma systems in a number of countries around
the world including those in Europe, the Commonwealth of Independent States, or CIS, and the Middle East. In July 2017, we entered
into agreements with Établissement Français du Sang, or EFS, to supply illuminators and platelet and plasma disposable kits. The
agreement for supply of illuminators and platelet disposable kits provided for a base term of two year, with two options for EFS to
extend for one year each, the first of which, EFS exercised in 2019. In January 2020, we entered into a new agreement with EFS to
supply plasma disposable kits and maintenance services for illuminators for a base term of two years, with two options for EFS to
extend for one year each. We understand that EFS has adopted the platelet system across France, but cannot provide any assurance
that national usage is sustainable, since no purchase volume commitments have been made by EFS, in our current contract or
otherwise. In addition, significant product revenue from the French market may decline or not consistently occur quarter-over-quarter.
We cannot assure that EFS will use the INTERCEPT Blood System for plasma at historical levels or at all. We also cannot provide
any assurance that we will be able to secure any subsequent contracts with EFS or that the terms, including the pricing or committed
volumes, if any, of any future contract will be equivalent or superior to the terms under our current contract.
If we are unable to gain widespread commercial adoption in markets where our blood safety products are approved for
commercialization, including the U.S., we will have difficulties achieving profitability. In order to commercialize all of our products
and product candidates, we will be required to conduct significant research, development, preclinical and clinical evaluation,
commercialization and regulatory compliance activities for our products and product candidates, which, together with anticipated
selling, general and administrative expenses, are expected to result in substantial losses. Accordingly, we may never achieve a
profitable level of operations in the future.
In addition to the product revenues from sales of our platelet and plasma systems, we anticipate that we will continue to recognize
revenue from our BARDA agreement. We recognize revenue associated with the BARDA agreement as qualified costs are incurred
for reimbursement over the performance period.
57
Fresenius
Fresenius Kabi AG, or Fresenius, manufactures and supplies the platelet and plasma systems to us under a supply agreement, or the
Supply Agreement. Fresenius is obligated to sell, and we are obligated to purchase, finished disposable kits for our platelet, plasma
and red blood cell systems. The Supply Agreement permits us to purchase platelet, plasma and red blood cell systems from third
parties to the extent necessary to maintain supply qualifications with such third parties or where local or regional manufacturing is
needed to obtain product registrations or sales. Pricing terms are initially fixed and decline at specified annual production levels, and
are subject to certain adjustments after the initial pricing term.
The initial term of the Supply Agreement extends through July 1, 2025, or the Initial Term, and is automatically renewed thereafter for
additional two-year terms, or Renewal Terms, subject to termination by either party upon (i) two years written notice prior to the
expiration of the Initial Term or (ii) one year written notice prior to the expiration of any Renewal Term. Under the Supply
Agreement, we have the right, but not the obligation, to purchase certain assets and assume certain liabilities from Fresenius. In the
event that Fresenius refuses or is unable to continue operating under the Supply Agreement, we may be unable to maintain inventory
levels or otherwise meet customer demand, and our business and operating results would be materially and adversely affected. Pricing
under the agreement is established through 2020 and at which time new pricing will need to be agreed upon by both parties or
calibrated off of the pre-existing prices using a price index for the remainder of the initial term.
Likewise, if we conclude that supply of the INTERCEPT Blood System or components from Fresenius 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 faster than we anticipate and may cause our supply chain to be less efficient. Like most regulated manufacturing
processes, our ability to produce our products is dependent on our or our suppliers’ ability to source components and raw materials
which may at times be in short demand or obsolete. In such cases, we and/or Fresenius or other suppliers may need to source, qualify
and obtain approval for replacement materials or components which would likely prove to be disruptive and consume capital resources
sooner than we anticipate.
See Note 13, Development and License Agreements, in Part IV, Item 15, "Exhibits and Financial Statement Schedules" of this Annual
Report on Form 10-K for further information regarding the Supply Agreement with Fresenius.
BARDA
In June 2016, we entered into an agreement with BARDA to support our development and implementation of pathogen reduction
technology for platelet, plasma, and red blood cells, including access to funding that could potentially support various activities,
including funding studies necessary to support a potential premarket approval application, submission to the FDA for the red blood
cell system, and acceleration of commercial scale up activities to facilitate potential adoption of the red blood cell system by U.S.
blood centers.
The five-year agreement with BARDA and its subsequent modifications provide for the reimbursement of certain amounts incurred by
us in connection with our satisfaction of certain contractual milestones. Under the agreement, we are reimbursed and recognize
revenue as qualified direct contract costs are incurred plus allowable indirect costs, based on approved provisional indirect billing
rates, which permit recovery of fringe benefits, overhead and general and administrative expenses. BARDA has committed to
reimburse certain of our expenses related to the clinical development of the red blood cell system during a base period, or the Base
Period, and under exercised option periods, or Option Periods, in an aggregate amount of up to $103.2 million. If we satisfy
subsequent milestones and BARDA were to exercise additional Option Periods, the total funding opportunity under the BARDA
agreement could reach up to $201.2 million over the five-year agreement period. If exercised by BARDA in its sole discretion, each
subsequent Option Period would fund activities related to broader implementation of the platelet and plasma system or the red blood
cell system in areas of Zika virus risk, clinical and regulatory development programs in support of the potential licensure of the red
blood cell system in the U.S., and development, manufacturing and scale-up activities for the red blood cell system. We are currently
responsible for co-investment of approximately $5.0 million, and would be responsible for an additional $9.6 million, if certain
additional Option Periods are exercised by BARDA. Through December 31, 2019, we have incurred approximately $0.8 million
related to the co-investment. BARDA will make periodic assessments of our progress and the continuation of the agreement is based
on our success in completing the required tasks under the Base Period and each exercised Option Period. BARDA has rights under
certain contract clauses to terminate the agreement, including the ability to terminate for convenience at any time.
Although BARDA has committed to reimburse us for up to $103.2 million in expenses to date, we may not receive all of these funds if
BARDA were to terminate the agreement. Amounts invoiced and currently payable under the BARDA agreement are subject to future
audits at the discretion of the government. These audits could result in an adjustment to revenue previously reported, which potentially
could be significant. In addition, activities covered under the base period and exercised options may ultimately cost more than is
covered by the BARDA contract or require a longer performance period to complete than is remaining on our agreement; if BARDA
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were unable to secure or allow additional funding or allow for additional time for completion, we would have to incur additional costs
to complete the activities or terminate the activities before completion.
Cantor
See Note 10, Stockholders’ Equity, in Part IV, Item 15, "Exhibits and Financial Statement Schedules" of this Annual Report on Form
10-K for further information regarding the sales agreement with Cantor Fitzgerald & Co. for the issuance and sale of our common
stock.
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 product revenue recognition and government contract revenue. 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—Revenue is recognized in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from
Contracts with Customers”, by applying the following five steps: (1) identify the contract(s) with a customer; (2) identify the
performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance
obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
The main source of our revenue is product revenue from sales of the INTERCEPT Blood System for platelets and plasma, or the
platelet and plasma systems or disposable kits, UVA illumination devices, or illuminators, spare parts and storage solutions, and
maintenance services of illuminators. We sell the platelet and plasma systems directly to blood banks, hospitals, universities,
government agencies, as well as to distributors in certain regions. For all sales of our INTERCEPT Blood System products, we use a
binding purchase order or signed sales contract as evidence of a contract and satisfaction of our policy. 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. The contracts with customers can include various combinations of products, and to a lesser extent, services. We
must determine whether products or services are capable of being distinct and accounted for as separate performance obligations, or
are accounted for as a combined performance obligation. We must allocate the transaction price to each performance obligation on a
relative standalone selling price, or SSP basis, and recognize the revenue when the performance obligation is satisfied. We determine
the SSP by using the historical selling price of the products and services. If the amount of consideration in a contract is variable, we
estimate the amount of variable consideration that should be included in the transaction price. Product revenue is recognized upon
transfer of control of promised products or services to customers in an amount that reflects the consideration that we expect to receive
in exchange for those products or services. Product revenue from the sale of illuminators, disposable kits, spare parts and storage
solutions are recognized upon the transfer of control of the products to the customer. Product revenue from maintenance services are
recognized ratably on a straight-line basis over the term of maintenance as customers simultaneously consume and receive benefits.
Freight costs charged to customers are recorded as a component of product revenue. Taxes invoiced to our customers and remitted to
governments are recorded on a net basis, which excludes such tax from product revenue.
• Government contract revenue—Revenue related to the cost reimbursement provisions under our BARDA agreement is recognized
as the allowable direct contract costs plus allowable indirect costs are incurred based on approved provisional indirect billing rates,
which permit recovery of fringe benefits, overhead and general and administrative expenses. Direct costs incurred under cost
reimbursable contracts are recorded as research and development expenses or general and administrative expenses. Payments to us
pursuant to our BARDA agreement are provisional payments subject to adjustment upon audit by the government. These audits could
result in an adjustment to revenue previously reported, which adjustments potentially could be significant. Management believes that
revenue for periods not yet audited has been recorded in amounts that are expected to be realized upon final audit and settlement.
When the final determination of the allowable costs for any year has been made, revenue and billings may be adjusted accordingly in
the period that the adjustment is known.
59
Results of Operations
Years Ended December 31, 2019, 2018 and 2017
Revenue
(in thousands, except percentages)
Product revenue................................................... $
Government contract revenue .............................
Total revenue ................................................. $
2019
Year Ended December 31,
2018
74,649 $
19,125
93,774 $
60,908 $
15,143
76,051 $
% Change
2017
2019 to 2018
43,568
7,758
51,326
23%
26%
23%
2018 to 2017
40%
95%
48%
Product revenue increased by $13.7 million during the year ended December 31, 2019, compared to the year ended December 31,
2018, primarily due to year-over-year sales volume growth in disposable kit sales in the U.S., the majority of which resulted from the
increased adoption of the platelet system in the U.S., and increased disposable kit sales in the Middle East, partially offset by product
mix in France and the deterioration in the Euro relative to the U.S. dollar during the year ended December 31, 2019, compared to the
year ended December 31, 2018, as most non-U.S. product revenue has been invoiced and transacted in Euro, and reported in U.S.
dollars.
Product revenue increased by $17.3 million during the year ended December 31, 2018, compared to the year ended December 31,
2017, primarily due to year-over-year sales volume growth in disposable kit sales in Europe, the majority of which resulted from the
nationwide adoption of the platelet system in France, and increased disposable kit sales for the platelet system in the U.S. and, to a
lesser extent, improved foreign exchange rates for the Euro. These increases were partially offset by decreased average selling prices
to our largest customers.
We anticipate product revenue for INTERCEPT disposable kits will increase in future periods driven by the expected expansion of
U.S. sales as increased market acceptance of the INTERCEPT Blood System and adoption of the INTERCEPT Blood System in
geographies where commercialization efforts are underway. However, a deterioration of the Euro relative to the U.S. dollar has in the
past and could in the future have a material impact on our product revenues, as a significant portion of our product revenue is expected
to come from Euro denominated markets over the near term. As a result of these and other factors, the historical results may not be
indicative of INTERCEPT Blood System product revenue in the future.
We recognized $19.1 million, $15.1 million and $7.8 million of revenue from our BARDA agreement during the years ended
December 31, 2019, 2018 and 2017, respectively, as a result of the direct and indirect contract costs incurred under the BARDA
agreement. As our RedeS and ReCePI studies continue to enroll patients, and as additional other qualified clinical and development
activities potentially increase under the exercised Option Periods, we anticipate that reported BARDA revenue will increase.
Cost of Product Revenue
Our cost of product revenue consists of the cost of the INTERCEPT Blood System sold, provisions for obsolete, slow-moving and
unsaleable product, certain order fulfillment costs, to the extent applicable, and costs for idle facilities. Inventory is accounted for on a
first-in, first-out basis.
(in thousands, except percentages)
Cost of product revenue ...................................... $
2019
Year Ended December 31,
2018
2017
2019 to 2018
33,419 $
31,634 $
22,531
6%
% Change
2018 to 2017
40%
Cost of product revenue increased by $1.8 million during the year ended December 31, 2019, compared to the year ended
December 31, 2018. The increase was primarily due to the increase of sales in the current period compared to the same period of the
prior year, partially offset by volume tier discounts from a contract manufacturer.
Cost of product revenue increased by $9.1 million during the year ended December 31, 2018, compared to the year ended December
31, 2017. The increase was primarily due to the increase in the volume of INTERCEPT platelet kits sold in the current year compared
to the prior year. Cost of product revenue was also impacted by less favorable foreign currency exchange rates related to inventory
production compared to prior year.
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Our gross margin on product sales was 55% during the year ended December 31, 2019, compared to 48% during the year ended
December 31, 2018.The increase in gross margin on product sales was primarily due to lower pricing from a contract manufacturer,
improved product mix with respect to sales in France, and increased demand for platelet products.
Our gross margin on product sales was 48% during the year ended December 31, 2018, compared to 48% during the year ended
December 31, 2017. Gross margin on product sales remained relatively flat in both periods.
Changes in our gross margin on product sales are affected by various factors, including the volume of product manufactured and the
relative per unit pricing in our agreement with Fresenius, exchange rate of the Euro relative to the U.S. dollar, manufacturing and
supply chain costs, the mix of product sold, and the mix of customers to which products are sold. We may encounter unforeseen
manufacturing difficulties which, at a minimum, may lead to higher than anticipated costs, scrap rates, or delays in manufacturing
products. In addition, we may face competition which may limit our ability to maintain existing selling prices for our products which
in turn would negatively affect our reported gross margins on product sales. Our gross margins on product sales may be impacted in
the future based on all of these and other criteria.
We expect to build inventory levels that will be sufficient to meet forecasted demand but expect those levels will exceed levels
produced in 2019.
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 associated with our facility related infrastructure, and laboratory chemicals and supplies.
(in thousands, except percentages)
Research and development.................................. $
2019
Year Ended December 31,
2018
2017
2019 to 2018
60,376 $
42,564 $
33,710
42%
% Change
2018 to 2017
26%
Research and development expenses increased $17.8 million during the year ended December 31, 2019, compared to the year ended
December 31, 2018, primarily due to increased costs associated with product enhancements and initiatives for expanded label claims,
activities related to the BARDA agreement, and increased development activities to support the anticipated launch of extended-storage
cryoprecipitate.
Research and development expenses increased $8.9 million during the year ended December 31, 2018, compared to the year ended
December 31, 2017, primarily due to costs associated with clinical development of our INTERCEPT red blood cell system, our pursuit
of supplemental approvals for the platelet and plasma systems, and activities related to the BARDA agreement.
We expect to incur additional research and development costs associated with planning, enrolling and completing our required post-
approval studies for the platelet system, pursuing potential regulatory approvals in other geographies where we do not currently sell
our platelet and plasma systems, planning and conducting in vitro studies and clinical development of our red blood cell system in
Europe and the U.S., completing activities to support our CE Mark submission for our red blood cell system in Europe, new product
development and product enhancements, including potential new label claims, and costs associated with performing the activities
under our BARDA agreement. 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 preclinical studies 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, which risks and uncertainties are discussed in further detail under “Item 1A—Risk Factors” in Part I of this
Annual Report on Form 10-K.
61
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 a number of countries around the world including those in U.S., Europe,
the CIS and the Middle East, Asia, Latin America, and expenses for accounting, tax, internal control, legal, and facility and
infrastructure related expenses, and insurance premiums.
(in thousands, except percentages)
Selling, general and administrative ..................... $
2019
Year Ended December 31,
2018
2017
2019 to 2018
66,205 $
56,841 $
52,615
16%
% Change
2018 to 2017
8%
Selling, general, and administrative expenses increased by $9.4 million during the year ended December 31, 2019, compared to the
year ended December 31, 2018, primarily due to higher non-cash stock compensation, investments in our supply chain capabilities and
to a lesser extent, investments in preparatory activities for the anticipated launch of extended-storage cryoprecipitate.
Selling, general, and administrative expenses increased by $4.2 million during the year ended December 31, 2018, compared to the
year ended December 31, 2017, primarily due to headcount and compensation related costs.
We anticipate our selling, general, and administrative spending to remain relatively consistent over the coming year.
Non-Operating Income (Expense), Net
Non-operating expense, net consists of foreign exchange gains and losses, interest charges incurred on our debt, and other non-
operating gains and losses, including interest earned from our short-term investment portfolio.
(in thousands, except percentages)
Foreign exchange loss ......................................... $
Interest expense...................................................
Other income, net ................................................
Total non-operating expense, net................... $
2019
Year Ended December 31,
2018
(86) $
(6,065)
1,396
(4,755) $
(87) $
(4,008)
1,748
(2,347) $
% Change
2017
2019 to 2018
(10)
(3,022)
3,864
832
(1%)
51%
(20%)
103%
2018 to 2017
770%
33%
(55%)
(382%)
Foreign exchange gain (loss)
Foreign exchange loss remained flat during the year ended December 31, 2019, compared to the year ended December 31, 2018, and
remained flat during the year ended December 31, 2018, compared to the year ended December 31, 2017, primarily due to relatively
consistent changes in foreign exchange rates for the Euro.
Interest expense
Interest expense increased $2.1 million during the year ended December 31, 2019, compared to the year ended December 31, 2018,
primarily due to the loss of $2.1 million on the extinguishment of the loan and security agreement, or the Oxford Term Loan
Agreement, with Oxford Finance LLC. See Note 8, Debt, in Part IV, Item 15, "Exhibits and Financial Statement Schedules" of this
Annual Report on Form 10-K for more information.
Interest expense increased $1.0 million during the year ended December 31, 2018, compared to the year ended December 31, 2017,
primarily due to increased average outstanding debt balance, and, to a lesser extent, due to the increased interest rate, under our
Amended Credit Agreement with Oxford, see discussion under the heading “Debt” below.
Other income, net
Other income, net decreased by $0.4 million during the year ended December 31, 2019, compared to the year ended December 31,
2018, primarily due to the decrease of interest income from our investments in marketable securities during the year ended
December 31, 2019.
Other income, net decreased by $2.1 million during the year ended December 31, 2018, compared to the year ended December 31,
2017, primarily due to the realized gain from the sale of our remaining shares of Aduro Biotech, Inc., or Aduro, common stock of
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approximately $3.5 million, during the year ended December 31, 2017, partially offset by the increase of interest income from our
investments in marketable securities during the year ended December 31, 2018.
Provision for Income Taxes
(in thousands, except percentages)
Provision for income taxes.................................. $
2019
Year Ended December 31,
2018
2017
2019 to 2018
263 $
229 $
3,887
15%
% Change
2018 to 2017
(94%)
For the year ended December 31, 2019 and 2018, we recorded a tax expense of $0.3 million and $0.2 million, respectively, which was
primarily a result of our Cerus Europe B.V. subsidiary’s operating profit.
Due to our history of cumulative operating losses, management has concluded that, after considering all of the available objective
evidence, it is not likely that all our net deferred tax assets as of December 31, 2019 will be realized. Accordingly, substantially all of
our U.S. deferred tax assets continue to be subject to a valuation allowance as of December 31, 2019. As of December 31, 2019, there
have been no material changes to our total amount of unrecognized tax benefits.
On December 22, 2017, tax legislation informally titled the Tax Cuts and Jobs Act, or the Tax Act, was signed into law, which
significantly changes the Internal Revenue Code of 1986, as amended. The Tax Act did not impact the tax expense recorded for 2017
or 2018 due to our continuing operating losses and the valuation allowance against substantially all of our deferred tax assets, but did
have other tax related effects. One component of the Tax Act is a provision which required the deemed distribution of the accumulated
earnings of Cerus Europe B.V. during the year ended December 31, 2017. As a result, we realized a deemed income inclusion of $3.2
million associated with our permanently reinvested earnings in our subsidiary. This deemed inclusion reduced the net operating loss
for the year but did not result in any cash outlays. We did not make any actual distribution of accumulated earnings and continue to
maintain the funds as permanently reinvested outside the U.S.
Liquidity and Capital Resources
In recent years, our sources of capital have primarily consisted of public issuance of common stock, debt instruments, and to a lesser
extent, cash from product sales and reimbursements under our BARDA agreement.
At December 31, 2019, we had cash, cash equivalents, and restricted cash of $37.4 million, of which $35.0 million was included in
cash and cash equivalents, and $2.4 million was included as restricted cash. At December 31, 2018, we had cash, cash equivalents, and
restricted cash of $31.6 million, of which $28.9 million was included in cash and cash equivalents, and $2.7 million was included as
restricted cash. Our cash equivalents primarily consist of money market instruments, which are classified for accounting purposes as
available-for-sale. In addition, we had $50.7 million of short-term investments at December 31, 2019, and $88.7 million at
December 31, 2018. We also had total indebtedness of approximately $44.4 million under our Credit, Security and Guaranty
Agreement (Term Loan), or the Term Loan Credit Agreement, and our Credit, Security and Guaranty Agreement (Revolving Loan), or
the Revolving Loan Credit Agreement, both with MidCap Financial Trust, at December 31, 2019, and $29.9 million under our Oxford
Term Loan Agreement at December 31, 2018, respectively. Excess cash is typically invested in highly liquid instruments of short-term
investments with high-quality credit rated corporate and government agency fixed-income securities in accordance with our
investment policy.
Operating Activities
Net cash used in operating activities was $65.8 million during the year ended December 31, 2019, compared to $31.2 million net cash
used during the year ended December 31, 2018. The increase in net cash used in operating activities was primarily related to increased
operating expenditures, the timing of payments and purchases related to inventories, the timing of sales during the year ended
December 31, 2019, as compared to the year ended December 31, 2018, and the one-time payment of $6.1 million to Fresenius in
August 2019.
Net cash used in operating activities was $31.2 million during the year ended December 31, 2018, compared to $52.2 million net cash
used during the year ended December 31, 2017. The decrease in net cash used in operating activities was primarily related to increased
product sales and reimbursements from the BARDA agreement, the timing of accounts receivable collections, and the timing of payments
and purchases related to inventories and research and development activities during the year ended December 31, 2018, as compared to
the year ended December 31, 2017.
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Investing Activities
Net cash provided by investing activities was $28.2 million during the year ended December 31, 2019, compared to $43.8 million net
cash used in investing activities during the year ended December 31, 2018. The change period over period was primarily due to higher
proceeds from the maturity and sale of our investments to support operations, and capital expenditures related to our headquarters
relocation during the year ended December 31, 2019, couples with lower purchases of investments as compared to the year ended
December 31, 2018.
Net cash used in investing activities was $43.8 million during year ended December 31, 2018, compared to $0.4 million net cash
provided by investing activities during the year ended December 31, 2017. The change period over period was primarily the result of
higher purchases of investments due to the proceeds from our January 2018 public offering of common stock, and lower proceeds
from the sale of our marketable securities during the year ended December 31, 2018, as compared to the same period in 2017.
Financing Activities
Net cash provided by financing activities was $43.5 million during the year ended December 31, 2019, compared to $92.8 million net
cash provided during the year ended December 31, 2018. The decrease in net cash provided by financing activities was primarily due
to the proceeds of approximately $57.2 million, net of the underwriting discounts and other issuance costs, received from our January
2018 public offering of common stock, partially offset by the net principal proceeds of $7.8 million received from the Term Loan
Credit Agreement described in more detail above during the year ended December 31, 2019.
Net cash provided by financing activities was $92.8 million during the year ended December 31, 2018, compared to $43.0 million net
cash provided during the year ended December 31, 2017. The increase in net cash provided by financing activities was primarily due
to the proceeds of approximately $57.2 million, net of the underwriting discounts and other issuance costs, received from our January
2018 public offering of common stock, partially offset by the proceeds received from the 2017 Term Loans described in more detail
above during the year ended December 31, 2017.
Working Capital
Working capital decreased to $77.8 million at December 31, 2019, from $94.2 million at December 31, 2018, primarily due to the
cash used to support ongoing operations which resulted in lower cash and cash equivalent balances.
Capital Requirements
Our near-term capital requirements are dependent on various factors, including operating costs and working capital investments
associated with developing and commercializing the INTERCEPT Blood System, including in connection with the continuing U.S.
commercial launch of our platelet and plasma systems, costs to develop different configurations of existing products and new
products, including our illuminator, costs associated with planning, enrolling and completing ongoing studies, and the post-approval
studies we are required to conduct in connection with the FDA approval of the platelet system, costs associated with pursuing
potential regulatory approvals in other geographies where we do not currently sell our platelet and plasma systems, costs associated
with conducting in vitro studies and clinical development of our red blood cell system in Europe and the U.S., costs associated with
performing the agreed-upon activities under our BARDA agreement, and costs related to creating, maintaining and defending our
intellectual property. Our long-term capital requirements will also be dependent on the success of our sales efforts, competitive
developments, the timing, costs and magnitude of our longer-term clinical trials and other development activities, required post-
approval studies, market preparedness and product launch activities for any of our product candidates and products in geographies
where we do not currently sell our products, and regulatory factors. Until we are able to generate a sufficient amount of product
revenue and generate positive net cash flows from operations, which we may never do, meeting our long-term capital requirements is
in large part reliant on continued access to funds under our BARDA agreement and the public and private equity and debt capital
markets, as well as on collaborative arrangements with partners, augmented by cash generated from operations and interest income
earned on the investment of our cash balances. While we believe that our available cash and cash equivalents and short-term
investments, as well as cash received from product sales and under our agreement with BARDA, will be sufficient to meet our capital
requirements for at least the next twelve months, if we are unable to generate sufficient product revenue, or access sufficient funds
under our BARDA agreement or the public and private equity and debt capital markets, we may be unable to execute successfully on
our operating plan. We have based our cash sufficiency estimate on assumptions that may prove to be incorrect. If our assumptions
prove to be incorrect, we could consume our available capital resources sooner than we currently expect or in excess of amounts than
we currently expect, which could adversely affect our commercialization and clinical development activities.
We have borrowed and in the future may borrow additional capital from institutional and commercial banking sources to fund future
growth, including pursuant to the Term Loan Credit Agreement and Revolving Loan Credit Agreement, or potentially pursuant to new
arrangements with different lenders. We may borrow funds on terms that may include restrictive covenants, including covenants that
restrict the operation of our business, liens on assets, high effective interest rates, financial performance covenants and repayment
provisions that reduce cash resources and limit future access to capital markets. In addition, we expect to continue to opportunistically
seek access to the equity capital markets to support our development efforts and operations. To the extent that we raise additional
64
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 our technologies or rights to
market and sell our products in certain geographies, grant licenses on terms that are not favorable to us, or issue equity that may be
substantially dilutive to our stockholders.
While we expect to receive significant funding under our agreement with BARDA, our ability to obtain the funding we expect to
receive under the agreement is subject to various risks and uncertainties, including with respect to BARDA’s ability to terminate the
agreement for convenience at any time and our ability to achieve the required milestones under the agreement. In addition, access to
federal contracts is subject to the authorization of funds and approval of our research plans by various organizations within the federal
government, including the U.S. Congress. The general economic environment, coupled with tight federal budgets, has led to a general
decline in the amount available for government funding. If BARDA were to eliminate, reduce or delay funding under our agreement,
this would have a significant negative impact on the programs associated with such funding and could have a significant negative
impact on our revenues and cash flows. In addition, if we are unable to generate sufficient perquisite Phase 3 clinical data and/or reach
agreement with the FDA on an additional Phase 3 clinical trial for chronic anemia in the U.S. for our red blood cell system, our
agreement with BARDA will be severely limited in scope or could be terminated altogether, and our ability to complete the
development activities required for licensure in the U.S. may require additional capital beyond which we currently have. If alternative
sources of funding are not available, we may be forced to suspend or terminate development activities related to the red blood cell
system in the U.S.
As a result of economic conditions, general global economic uncertainty, political change, 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 the volatile global financial markets, general economic uncertainty or other factors,
we may need to curtail planned development or commercialization activities. In addition, we may need to obtain additional funds to
complete development activities for the red blood cell system necessary for potential regulatory approval in Europe, if costs are higher
than anticipated or we encounter delays. We may need to obtain additional funding to conduct additional randomized controlled
clinical trials for existing or new products, particularly if we are unable to access any additional portions of the funding contemplated
by our BARDA agreement, and we may choose to defer such activities until we can obtain sufficient additional funding or, at such
time, our existing operations provide sufficient cash flow to conduct these trials.
Other Information
In January 2020, we issued and sold 16,866,667 shares of our common stock, par value $0.001 per share, at $3.75 per share in an
underwritten public offering. The total proceeds from this offering were $63.3 million, before deducting estimated offering expenses
payable by us.
Commitments and Off-Balance Sheet Arrangements
Off-balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2019.
Contractual Commitments
The following summarizes our contractual commitments at December 31, 2019:
Contractual Commitments
Debt .........................................................................................$
Operating leases.......................................................................
Minimum purchase requirements ............................................
Other commitments .................................................................
Total contractual obligations..............................................$
Total
1 year
2 - 3 years
4 - 5 years
After 5
years
56,236 $
30,988
15,667
702
103,593 $
8,067 $
3,307
9,711
684
21,769 $
20,702 $
6,181
3,116
18
30,017 $
27,467 $
5,447
793
—
33,707 $
—
16,053
2,047
—
18,100
Debt
See Note 8, Debt, in Part IV, Item 15, "Exhibits and Financial Statement Schedules" of this Annual Report on Form 10-K for more
information on the debt under our Term Loan Credit Agreement and the Revolving Loan Credit Agreement.
Operating Leases
See Note 9, Commitments and Contingencies, in Part IV, Item 15, "Exhibits and Financial Statement Schedules" of this Annual Report
on Form 10-K for more information on the operating leases.
65
Minimum Purchase Requirements
Our minimum purchase commitments include certain components of our INTERCEPT Blood System which we purchase from third-
party manufacturers.
Other Commitments
Our other commitments primarily consist of obligations related to business insurance financing and certain other warehousing
obligations.
Financial Instruments
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. We currently invest our cash and cash equivalents in 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 corporate debt and U.S. government
agency 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. We did not record any other-than-
temporary impairment losses during the years ended December 31, 2019, 2018 and 2017. Adverse global economic conditions have
had, and may continue to have, a negative impact on the market values of potential investments.
New Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, in Part IV, Item 15, "Exhibits and Financial Statement Schedules" of this
Annual Report on Form 10-K for more information on new accounting pronouncements.
66
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
At December 31, 2019, we held cash, cash equivalents, short-term investments and investments in marketable equity securities of
$85.7 million. We do not believe our exposure to interest rate risk to be material given we held cash in interest-bearing accounts with
financial institutions and the short-term nature of our investment portfolio consisted of highly liquid money market instruments and
corporate debt and U.S. government agency securities with short-term maturities. The weighted average interest rates of our cash and
cash equivalents at December 31, 2019 were 1.25%.
Our exposure to market rate risk for changes in interest rates relates primarily to our money market instruments, corporate debt
securities and the amounts borrowed pursuant to the Term Loan Credit Agreement and Revolving Loan Credit Agreement. We do not
use derivative financial instruments. By policy, we may place investments with high quality debt security issuers, limit the amount of
credit exposure to any one issuer and limit duration by restricting the term for single securities and for the portfolio as a whole. Our
investments are held and managed by a third-party capital management adviser that in turn, utilizes a combination of active market
quotes and where necessary, proprietary pricing models as well as a subscribed pricing service, in order to estimate fair value. While
we believe that we will be able to recognize the fair value of our money market instruments when they mature or are sold, or if we
purchase investments in securities in the future, there can be no assurance that the markets for these securities will not deteriorate
further or that the institutions that these securities are with will be able to meet their debt obligations.
With respect to the Term Loan Credit Agreement, we are exposed to risks associated with changes in interest rates in connection with
our borrowings under the Term Loan Credit Agreement. Based on our indebtedness under the Term Loan Credit Agreement of $39.4
million as of December 31, 2019, and the interest rate on such borrowings then in effect, a hypothetical 100 basis point increase in
interest rates would increase our net interest expense in 2019 by approximately $0.4 million.
Foreign Currency Risk
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
impacted by changes in these or other factors.
Product sales for our blood safety products are predominantly made in Europe and generally are invoiced to customers in Euro. In
addition, we incur operating expenses, including payment for finished goods inventory of disposable kits for the platelet and plasma
systems. These inventory purchases and operating expenses are generally paid in Euro and, to a much lesser degree, 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 non-operating income
(expense), net on our consolidated statements of operations. Significant fluctuations in the volatility of foreign currencies relative to
the United States dollar may materially impact our results of operations. An unfavorable 10% change in foreign currency exchange
rates for our cash, accounts receivable, accounts payable and accrued liabilities that are denominated in foreign currencies at
December 31, 2019, would have negatively impacted our annual financial results by $1.0 million. Currently we do not have any near-
term plans to enter into a formal hedging program to mitigate the effects of foreign currency volatility.
Item 8.
Financial Statements and Supplementary Data
Our consolidated financial statements, together with related notes and reports of Ernst & Young LLP, independent registered public
accounting firm, are listed in Item 15(a) and included herein.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
67
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have carried out an evaluation under the supervision and with the participation of management, including our principal executive
officer and principal financial officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by this Annual Report on Form 10-K. Based on their
evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were
effective as of December 31, 2019.
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 control system 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 Annual Report on Form 10-K, our disclosure controls and procedures were effective to provide
reasonable assurance that the objective of our disclosure control system were met.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules
13a-15(f) under the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed 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 in the United States of America.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2019.
Management based its assessment on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) in Internal Control—Integrated Framework. Based on this evaluation, our management concluded that
as of December 31, 2019, our internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2019, has been audited by Ernst & Young LLP,
our independent registered public accounting firm, as stated in their attestation report, which is included below.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting which occurred during our fiscal quarter ended December 31,
2019, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
68
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Cerus Corporation
Opinion on Internal Control over Financial Reporting
We have audited Cerus Corporation’s internal control over financial reporting as of December 31, 2019, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). In our opinion, Cerus Corporation (the Company) maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of
operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31,
2019, and the related notes and our report dated February 21, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based
on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Redwood City, California
February 21, 2020
69
Item 9B. Other Information
None.
70
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K since we intend to file our definitive proxy
statement for our 2020 annual meeting of stockholders, or the Proxy Statement, pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended, not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-
K, and certain information to be included in the proxy statement is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item regarding executive officers, directors and nominees for directors, including information with
respect to our audit committee and audit committee financial expert, and the compliance of certain reporting persons with
Section 16(a) of the Securities Exchange Act of 1934, as amended, will be included in the Proxy Statement and is incorporated herein
by reference.
Code of Ethics
We have adopted the Cerus Corporation Code of Business Conduct and Ethics, or Ethics Code, that applies to all of our officers,
directors and employees. The Ethics Code is available on our website at www.cerus.com on the “Corporate Governance” page of the
section titled “Investors.” If we make any substantive amendments to the Ethics Code or grant any waiver from a provision of the
Ethics Code to any executive officer or director, we intend to promptly disclose the nature of the amendment or waiver as required by
applicable laws. To satisfy our disclosure requirements, we may post any waivers of or amendments to the Ethics Code on our website
in lieu of filing such waivers or amendments on a Form 8-K.
Our employees are required to report any conduct that they believe in good faith to be an actual or apparent violation of the Ethics
Code. The Audit Committee of our Board of Directors has established procedures to receive, retain and address complaints regarding
accounting, internal accounting controls or auditing matters and to allow for the confidential and anonymous submission by
employees of related concerns.
Item 11.
Executive Compensation
The information required by this item is incorporated herein by reference to our Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to our Proxy Statement.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to our Proxy Statement.
Item 14.
Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to our Proxy Statement.
71
PART IV
Item 15.
Exhibits and Financial Statement Schedules
The following documents are being filed as part of this Annual Report on Form 10-K:
(a)
Financial Statements.
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm........................................................................
Consolidated Balance Sheets as of December 31, 2019 and 2018.................................................................................................
Consolidated Statements of Operations for the three years ended December 31, 2019 ................................................................
Consolidated Statements of Comprehensive Loss for the three years ended December 31, 2019 ................................................
Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2019 ................................................
Consolidated Statements of Cash Flows for the three years ended December 31, 2019 ...............................................................
Notes to Consolidated Financial Statements ..................................................................................................................................
Page
78
80
81
82
83
84
85
Other information is omitted because it is either presented elsewhere, is inapplicable or is immaterial as defined in the
instructions.
(b)
Exhibits.
Exhibit Number
Description of Exhibit
3.1(13)
Amended and Restated Certificate of Incorporation of Cerus Corporation.
3.2(13)
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Cerus Corporation.
3.3(18)
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Cerus Corporation.
3.4(2)
Amended and Restated Bylaws of Cerus Corporation.
4.1(1)
Specimen Stock Certificate.
4.2
Description of securities registered under Section 12 of the Exchange Act of 1934.
Supply and/or Manufacturing Agreements
10.1(19)† Amended and Restated Supply Agreement, dated April 21, 2014, by and between Cerus Corporation and Purolite
Corporation.
10.2(26)† Amended and Restated Supply and Manufacturing Agreement, dated April 1, 2017, by and between Cerus Corporation
and Porex Corporation.
10.3(29) †
First Amendment to Supply and Manufacturing Agreement, by and between Cerus Corporation and Porex Corporation,
dated June 22, 2018.
10.4(22)† Amended and Restated Manufacturing and Supply Agreement, dated October 19, 2015, by and between Cerus
Corporation and Fresenius Kabi Deutschland GmbH.
10.5(29) † Amendment to Amended and Restated Manufacturing and Supply Agreement, by and between Cerus Corporation and
Fresenius Kabi Deutschland GmbH, effective as of August 10, 2018.
10.6(3)† Manufacturing and Supply Agreement, dated September 30, 2008, by and between Cerus Corporation and NOVA
Biomedical Corporation.
10.7(23)† Amendment #1 to the Manufacturing and Supply Agreement, dated March 15, 2016, by and between NOVA
Biomedical Corporation and Cerus Corporation.
10.8(10)† Amended and Restated Supply Agreement, dated as of September 1, 2011, between Cerus Corporation and Ash
72
Exhibit Number
Description of Exhibit
Stevens Inc.
10.9(15)† Addendum 1 to Amended and Restated Supply Agreement, dated August 1, 2013, by and between Cerus Corporation
and Ash Stevens, Inc.
Loan and Security Agreements
10.10(30) †† Credit, Security and Guaranty Agreement (Term Loan), dated March 29, 2019, by and among Cerus Corporation, the
lenders party thereto and MidCap Financial Trust.
10.11(30) †† Credit, Security and Guaranty Agreement (Revolving Loan), dated March 29, 2019, by and among Cerus Corporation,
the lenders party thereto and MidCap Financial Trust.
Real Estate Lease Agreements
10.12(27)
Lease, dated February 16, 2018, between Cerus Corporation and 1200 Concord LLC.
10.13(28)
First Amendment to Lease, dated May 11, 2018, between Cerus Corporation and 1200 Concord LLC.
10.14(29)
Second Amendment to Lease, dated August 10, 2018, between Cerus Corporation and 1200 Concord LLC.
10.15(32)
Third Amendment to Lease, dated October 5, 2018, between Cerus Corporation and 1200 Concord LLC.
10.16(32)
Fourth Amendment to Lease, dated November 30, 2018, between Cerus Corporation and 1200 Concord LLC.
Employment Agreements or Offer Letters
10.17(9)*
Employment Letter, by and between Cerus Corporation and William M. Greenman, dated May 12, 2011.
10.18(14)* Addendum to Employment Agreement for William M. Greenman, dated December 5, 2012.
10.19(28)*
Amendment to Employment Letter, by and between Cerus Corporation and William M. Greenman, dated April 17,
2018.
10.20(16)* Employment Letter, by and between Cerus Corporation and Laurence Corash, dated July 30, 2009.
10.21(8)*
Employment Letter, by and between Cerus Corporation and Laurence Corash, dated March 2, 2010.
10.22(6)*
Employment Letter for Kevin D. Green, dated May 1, 2009.
10.23(28)* Amendment to Employment Letter, by and between Cerus Corporation and Kevin Green, dated April 17, 2018.
10.24(14)* Employment Letter, by and between Cerus Corporation and Chrystal Menard, dated October 19, 2012.
10.25(16)* Employment Letter, by and between Cerus Corporation and Carol Moore, dated December 14, 2007.
10.26(21)* Employment Letter, by and between Cerus Corporation and Richard J. Benjamin MBChB, PhD, FRCPath, dated
May 12, 2015.
10.27(25)* Employment Letter, by and between Cerus Corporation and Vivek Jayaraman, dated May 31, 2016.
Stock Plans and Related Forms
10.28(20)* Amended and Restated 1996 Employee Stock Purchase Plan, effective June 10, 2015.
10.29(31)* Amended and Restated 2008 Equity Incentive Plan, effective June 5, 2019.
73
Exhibit Number
Description of Exhibit
10.30(11)* Form of Option Agreement for employees under the Amended and Restated 2008 Equity Incentive Plan.
10.31(11)* Form of Option Agreement for non-employee directors under the Amended and Restated 2008 Equity Incentive Plan.
10.32(11)* Form of Restricted Stock Unit Agreement under the Amended and Restated 2008 Equity Incentive Plan.
10.33(24)*
Cerus Corporation Inducement Plan.
10.34(24)*
Form of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the Cerus Corporation
Inducement Plan.
10.35(24)*
Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the Cerus Corporation
Inducement Plan.
10.36(28)*
Form of Restricted Stock Unit Agreement under the Amended and Restated 2008 Equity Incentive Plan, amended as of
April 17, 2018.
10.37(28)*
Form of Restricted Stock Unit Agreement for Non-Employee Directors under the Amended and Restated 2008 Equity
Incentive Plan, amended as of April 17, 2018.
Other Compensatory Plans or Agreements
10.38(14)* Bonus Plan for Senior Management of Cerus Corporation, as amended December 5, 2012.
10.39(28)* Cerus Corporation Change of Control Severance Benefit Plan, amended as of April 17, 2018.
10.40(5)*
Form of Severance Benefits Agreement.
10.41(27)* Amended and Restated Non-Employee Director Compensation Policy, effective March 2, 2018.
10.42(27)*
2017 and 2018 Executive Officer Compensation Arrangements.
10.43(30)*
2018 and 2019 Executive Officer Compensation Arrangements.
Other Material Agreements
10.44(1)
Form of Indemnity Agreement entered into between Cerus Corporation and each of its directors and executive officers.
10.45(4)
Form of Amended and Restated Indemnity Agreement, adopted April 24, 2009.
10.46(12) Controlled Equity OfferingSM Sales Agreement, dated August 31, 2012, by and between Cerus Corporation and
Cantor Fitzgerald & Co.
10.47(17) Amendment No 1. to Controlled Equity OfferingSM Sales Agreement, dated March 21, 2014, by and between Cerus
Corporation and Cantor Fitzgerald & Co.
10.48(23) Amendment No. 2 to Controlled Equity OfferingSM Sales Agreement, dated May 5, 2016, by and between Cerus
Corporation and Cantor Fitzgerald & Co.
10.49(26) Amendment No. 3 to Controlled Equity OfferingSM Sales Agreement, dated August 4, 2017, by and between Cerus
Corporation and Cantor Fitzgerald & Co.
10.50(7)†
License Agreement, dated as of February 2, 2005, by and between Cerus Corporation and Fresenius Kabi AG
(successor-in-interest to Baxter Healthcare S.A. and Baxter Healthcare Corporation).
21.1
List of Registrant’s subsidiaries.
74
Exhibit Number
Description of Exhibit
23.1
Consent of Independent Registered Public Accounting Firm.
24.1
Power of Attorney (see signature page).
31.1
31.2
Certification of the Principal Executive Officer of Cerus Corporation pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Certification of the Principal Financial Officer of Cerus Corporation pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1(33)
Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
101.INS
Inline XBRL Instance Document. – the instance document does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
†
††
*
(1)
(2)
(3)
(4)
(5)
(6)
Certain portions of this exhibit are subject to a confidential treatment order.
Certain portions of this exhibit (indicated by “[***]”) have been omitted as the Registrant has determined (i) the
omitted information is not material and (ii) the omitted information would likely cause harm to the Registrant if
publicly disclosed.
Compensatory Plan.
Incorporated by reference to the like-described exhibit to the Registrant’s Registration Statement on Form S-1 (File
No. 333-11341) and amendments thereto.
Incorporated by reference to the like-described exhibit to the Registrant’s Current Report on Form 8-K, filed with the
SEC on June 19, 2008.
Incorporated by reference to the like-described exhibit to the Registrant’s Annual Report on Form 10-K, for the year
ended December 31, 2008.
Incorporated by reference to the like-described exhibit to the Registrant’s Current Report on Form 8-K, filed with the
SEC on April 30, 2009.
Incorporated by reference to the like-described exhibit to the Registrant’s Current Report on Form 8-K, filed with the
SEC on June 1, 2009.
Incorporated by reference to the like-described exhibit to the Registrant’s Quarterly Report on Form 10-Q, for the
quarter ended June 30, 2009.
75
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
Incorporated by reference to the like-described exhibit to the Registrant’s Annual Report on Form 10-K, for the year
ended December 31, 2009.
Incorporated by reference to the like-described exhibit to the Registrant’s Current Report on Form 8-K, filed with the
SEC on March 8, 2010.
Incorporated by reference to the like-described exhibit to the Registrant’s Current Report on Form 8-K, filed with the
SEC on May 18, 2011.
Incorporated by reference to the like-described exhibit to the Registrant’s Quarterly Report on Form 10-Q, for the
quarter ended September 30, 2011.
Incorporated by reference to the like-described exhibit to the Registrant’s Quarterly Report on Form 10-Q, for the
quarter ended March 31, 2012.
Incorporated by reference to the like-described exhibit to the Registrant’s Current Report on Form 8-K, filed with the
SEC on August 31, 2012.
Incorporated by reference to the like-described exhibit to the Registrant’s Quarterly Report on Form 10-Q, for the
quarter ended September 30, 2012.
Incorporated by reference to the like-described exhibit to the Registrant’s Annual Report on Form 10-K, for the year
ended December 31, 2012.
Incorporated by reference to the like-described exhibit to the Registrant’s Quarterly Report on Form 10-Q, for the
quarter ended September 30, 2013.
Incorporated by reference to the like-described exhibit to the Registrant’s Annual Report on Form 10-K, for the year
ended December 31, 2013.
Incorporated by reference to the like-described exhibit to the Registrant’s Current Report on Form 8-K, filed with the
SEC on March 21, 2014.
Incorporated by reference to the like-described exhibit to the Registrant’s Quarterly Report on Form 10-Q, for the
quarter ended June 30, 2014.
Incorporated by reference to the like-described exhibit to Amendment No. 1 to the Registrant’s Quarterly Report on
Form 10-Q/A, for the quarter ended June 30, 2014.
Incorporated by reference to the like-described exhibit to Registrant’s Quarterly Report on Form 10-Q, for the quarter
ended June 30, 2015.
Incorporated by reference to the like-described exhibit to Registrant’s Quarterly Report on Form 10-Q, for the quarter
ended September 30, 2015.
Incorporated by reference to the like-described exhibit to Registrant's Annual Report on Form 10-K, for the year ended
December 31, 2015.
Incorporated by reference to the like-described exhibit to Registrant's Quarterly Report on Form 10-Q, for the quarter
ended March 31, 2016.
Incorporated by reference to the like-described exhibit to Registrant’s Current Report on Form 8-K, filed with the SEC
on August 31, 2016.
Incorporated by reference to the like-described exhibit to Registrant's Quarterly Report on Form 10-Q, for the quarter
ended September 30, 2016.
76
(26)
(27)
(28)
(29)
(30)
(31)
(32)
(33)
Incorporated by reference to the like-described exhibit to Registrant’s Quarterly Report on Form 10-Q, for the quarter
ended June 30, 2017.
Incorporated by reference to the like-described exhibit to Registrant’s Quarterly Report on Form 10-Q, for the quarter
ended March 31, 2018.
Incorporated by reference to the like-described exhibit to Registrant’s Quarterly Report on Form 10-Q, for the quarter
ended June 30, 2018.
Incorporated by reference to the like-described exhibit to Registrant’s Quarterly Report on Form 10-Q, for the quarter
ended September 30, 2018.
Incorporated by reference to the like-described exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2019.
Incorporated by reference to the like-described exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2019.
Incorporated by reference to the like-described exhibit to Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2019.
This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange
Commission, and is not incorporated by reference into any filing of the Registrant’s 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-K), irrespective of any general incorporation language contained in such filing.
Item 16.
Form 10-K Summary
None.
77
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Cerus Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cerus Corporation (the Company) as of December 31, 2019 and
2018, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
Framework) and our report dated February 21, 2020 expressed an unqualified opinion thereon.
Adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842)
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due
to the adoption of ASU No. 2016-02, Leases (Topic 842), and the amendments in ASU No. 2018-11, Leases (Topic 842): Targeted
Improvements, on January 1, 2019, using a modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the
critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not,
by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or
disclosures to which it relates.
78
Revenue Recognition
Description of the
Matter
In the year ended December 31, 2019, the Company recognized $74.6 million of product revenue. As
discussed in Note 2 to the consolidated financial statements, product revenue is recognized upon transfer of
control of promised products or services to customers in an amount that reflects the consideration which the
Company expects to receive in exchange for those products or services. Product revenue from the sale of
illuminators, disposable kits, spare parts and storage solutions are recognized upon the transfer of control of
the products to the customer.
Auditing the Company’s revenue recognition was challenging due to variability in the terms and conditions
within certain customer contracts and, as certain customer contracts include multiple products and/or services
requiring management to apply judgment to determine whether the products and services are distinct
performance obligations or should be accounted for as a combined performance obligation. Customer
contracts must be carefully evaluated for terms that might affect the timing or measurement of revenue
recognition.
How We Addressed
the Matter in Our
Audit
We obtained an understanding of, evaluated the design and tested the operating effectiveness of controls over
the Company’s revenue recognition process, including management’s assessment of performance obligations.
Our audit procedures over the determination of the distinct performance obligations and the timing of revenue
recognition included, among others, obtaining an understanding of the terms of new revenue contracts by
reading both the Company’s summary documentation and the corresponding contract for a sample of new
revenue agreements. We also confirmed with a sample of customers the terms and conditions of certain
contracts via direct correspondence with customers.
For a sample of individual sales transactions, we inspected the executed contract and purchase order to
identify the contract, identified the performance obligation(s) in the contract to compare to those identified by
management, and calculated the transaction price. We evaluated the Company’s allocation of the transaction
price to the performance obligations, and inspected third-party evidence of transfer of control of the goods or
services to the customer.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1991.
Redwood City, California
February 21, 2020
79
CERUS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
Current assets:
ASSETS
Cash and cash equivalents ................................................................................................ $
Short-term investments .....................................................................................................
Accounts receivable..........................................................................................................
Inventories ........................................................................................................................
Prepaid and other current assets........................................................................................
Total current assets......................................................................................................
Non-current assets:
Property and equipment, net .............................................................................................
Goodwill ...........................................................................................................................
Operating lease right-of-use assets ...................................................................................
Intangible assets, net .........................................................................................................
Restricted cash ..................................................................................................................
Other assets .......................................................................................................................
Total assets .................................................................................................................. $
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................................................................. $
Accrued liabilities .............................................................................................................
Manufacturing and development obligations ...................................................................
Debt – current ...................................................................................................................
Operating lease liabilities – current ..................................................................................
Deferred product revenue – current ..................................................................................
Total current liabilities ................................................................................................
Non-current liabilities:
Debt – non-current ............................................................................................................
Operating lease liabilities – non-current...........................................................................
Other non-current liabilities..............................................................................................
Total liabilities.............................................................................................................
Commitments and contingencies
Stockholders' equity:
December 31,
2019
December 31,
2018
34,986 $
50,732
16,882
19,490
6,018
128,108
14,898
1,316
14,122
132
2,435
4,524
165,535 $
22,185 $
20,951
—
5,017
1,613
570
50,336
39,414
18,406
327
108,483
28,859
88,718
8,752
13,539
7,034
146,902
8,130
1,316
—
334
2,728
4,050
163,460
18,595
19,800
5,928
7,857
—
498
52,678
22,013
—
4,250
78,941
Preferred stock, $0.001 par value; 5,000 shares authorized, issuable in series; zero
shares issued and outstanding at December 31, 2019 and 2018, respectively...............
Common stock, $0.001 par value; 225,000 shares authorized; 144,291 and 136,853
shares issued and outstanding at December 31, 2019 and 2018, respectively...............
Additional paid-in capital .................................................................................................
Accumulated other comprehensive income (loss) ............................................................
Accumulated deficit..........................................................................................................
Total stockholders' equity............................................................................................
Total liabilities and stockholders' equity ............................................................... $
—
—
144
906,905
114
(850,111)
57,052
165,535 $
136
863,531
(281)
(778,867)
84,519
163,460
See accompanying Notes to Consolidated Financial Statements.
80
CERUS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
2018
2019
Product revenue...................................................................................................................... $ 74,649 $ 60,908 $
Cost of product revenue .........................................................................................................
Gross profit on product revenue .......................................................................................
Government contract revenue ................................................................................................
Operating expenses:
31,634
29,274
15,143
33,419
41,230
19,125
Research and development ...............................................................................................
Selling, general and administrative...................................................................................
Total operating expenses .............................................................................................
Loss from operations
Non-operating (expense) income, net:
60,376
66,205
126,581
(66,226)
42,564
56,841
99,405
(54,988)
2017
43,568
22,531
21,037
7,758
33,710
52,615
86,325
(57,530)
(10)
Foreign exchange loss.......................................................................................................
(3,022)
Interest expense.................................................................................................................
3,864
Other income, net..............................................................................................................
832
Total non-operating (expense) income, net.................................................................
(56,698)
Loss before income taxes .......................................................................................................
3,887
Provision for income taxes .....................................................................................................
Net loss................................................................................................................................... $ (71,244) $ (57,564) $ (60,585)
(87)
(4,008)
1,748
(2,347)
(57,335)
229
(86)
(6,065)
1,396
(4,755)
(70,981)
263
Net loss per share:
Basic and diluted............................................................................................................... $
(0.51) $
(0.44) $
(0.56)
Weighted average shares used for calculating net loss per share:
Basic and diluted...............................................................................................................
139,831
131,663
108,221
See accompanying Notes to Consolidated Financial Statements.
81
CERUS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Net loss........................................................................................................................ $ (71,244)
Other comprehensive income (loss)
2019
2018
$ (57,564)
Unrealized gains (losses) on available-for-sale investments, net of taxes ............... $
395
Comprehensive loss .................................................................................................... $ (70,849)
$
(184)
$ (57,748)
2017
(60,585)
(200)
(60,785)
$
$
$
Year Ended December 31,
See accompanying Notes to Consolidated Financial Statements.
82
CERUS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Common Stock
Additional
Paid-in
Accumulated
Other
Comprehensive
Accumulated
Shares
Amount Capital
Income (Loss) Deficit
Total
Stockholders'
Equity
1
11
1,094
10,986
30,145
— —
— —
— —
2,426
9,355
—
—
115 760,225
Balance at December 31, 2016...................................................... 103,475 $ 103 $718,299 $
Issuance of common stock from public offering,
net of offering costs ...................................................................
Issuance of common stock from exercise of stock
options, vesting of restricted stock units, and purchases from
ESPP ...........................................................................................
Stock-based compensation ............................................................
Other comprehensive loss..............................................................
Net loss ..........................................................................................
Balance at December 31, 2017...................................................... 115,555
Issuance of common stock from public offering,
net of offering costs ...................................................................
Issuance of common stock from exercise of stock
options, vesting of restricted stock units, and purchases from
ESPP ...........................................................................................
Stock-based compensation ............................................................
Other comprehensive loss..............................................................
Net loss ..........................................................................................
Balance at December 31, 2018...................................................... 136,853
Issuance of common stock from public offering,
net of offering costs ...................................................................
Issuance of common stock from exercise of stock
options, vesting of restricted stock units, and purchases from
ESPP ...........................................................................................
— — 13,312
Stock-based compensation ............................................................
—
— —
Other comprehensive income ........................................................
Net loss ..........................................................................................
—
— —
Balance at December 31, 2019...................................................... 144,291 $ 144 $906,905 $
— — 10,394
—
— —
—
— —
136 863,531
26,854
85,067
18,202
5,648
1,790
7,845
3,208
3,096
18
6
3
2
103 $ (660,718) $
57,787
—
—
30,156
—
—
(200)
—
(97)
—
—
—
(60,585)
(721,303)
2,427
9,355
(200)
(60,585)
38,940
—
—
85,085
—
—
(184)
—
(281)
—
—
—
(57,564)
(778,867)
7,848
10,394
(184)
(57,564)
84,519
—
—
26,860
—
—
—
—
—
395
—
(71,244)
114 $ (850,111) $
3,210
13,312
395
(71,244)
57,052
See accompanying Notes to Consolidated Financial Statements.
83
CERUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2019
2018
2017
Operating activities
Net loss ................................................................................................................................... $ (71,244) $ (57,564)
Adjustments to reconcile net loss to net cash used in operating activities:
$ (60,585)
Depreciation and amortization ..........................................................................................
Stock-based compensation ................................................................................................
Non-cash operating lease cost ...........................................................................................
Non-cash interest expense.................................................................................................
Loss on disposal of property and equipment.....................................................................
Non-cash tax expense from realized gain on available-for-sale securities .......................
Gain on sale of investment in marketable equity securities ..............................................
Changes in operating assets and liabilities:
Accounts receivable.....................................................................................................
Inventories ...................................................................................................................
Other assets ..................................................................................................................
Accounts payable.........................................................................................................
Accrued liabilities and other non-current liabilities ....................................................
Manufacturing and development obligations ..............................................................
Deferred product revenue ............................................................................................
Net cash used in operating activities ......................................................................................
Investing activities
Capital expenditures..........................................................................................................
Purchases of investments ..................................................................................................
Proceeds from maturities and sale of investments ............................................................
Net cash provided by (used in) investing activities ................................................................
Financing activities
2,403
13,312
1,580
386
15
—
—
(8,130)
(6,043)
1,787
5,017
1,295
(6,288)
72
(65,838)
(8,935)
(43,907)
81,027
28,185
Net proceeds from equity incentives.................................................................................
Net proceeds from public offering ....................................................................................
Net proceeds from revolving line of credit .......................................................................
Proceeds from loans ..........................................................................................................
Repayment of debt ............................................................................................................
Net cash provided by financing activities...............................................................................
Net increase (decrease) in cash, cash equivalents and restricted cash....................................
Cash, cash equivalents and restricted cash, beginning of period............................................
Cash, cash equivalents and restricted cash, end of period...................................................... $
Supplemental disclosure of cash flow information:
3,210
26,931
5,017
39,433
(31,104)
43,487
5,834
31,587
37,421 $
1,445
10,394
—
1,248
5
—
—
3,663
806
(2,744)
5,683
6,046
(266)
38
(31,246)
(1,144)
(80,701)
37,997
(43,848)
7,848
85,036
—
—
(133)
92,751
17,657
13,930
31,587
1,811
9,355
—
551
—
3,825
(3,466)
(5,547)
(2,092)
1,107
2,487
(626)
680
265
(52,235)
(353)
(68,792)
69,566
421
2,428
30,197
—
30,000
(19,625)
43,000
(8,814)
22,744
$ 13,930
Cash paid for interest ........................................................................................................ $
Cash paid for income taxes ...............................................................................................
3,077 $
229
2,728
254
$
2,034
160
Non-cash investing activities:
Non-cash purchases of capital expenditures .....................................................................
2,949
2,222
—
See accompanying Notes to Consolidated Financial Statements.
84
CERUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Basis of Presentation
Cerus Corporation (the “Company”) was incorporated in September 1991 and is developing and commercializing the INTERCEPT
Blood System, which is designed to enhance the safety of blood components through pathogen reduction. The Company has
worldwide commercialization rights for the INTERCEPT Blood System for platelets, plasma and red blood cells.
The Company sells its INTERCEPT platelet and plasma systems in the United States of America (“U.S.”), Europe, the
Commonwealth of Independent States (“CIS”) countries, the Middle East and selected countries in other regions around the world.
The Company conducts significant research, development, testing and regulatory compliance activities on its product candidates that,
together with anticipated selling, general, and administrative expenses, are expected to result in substantial additional losses, and the
Company may need to adjust its operating plans and programs based on the availability of cash resources. The Company’s ability to
achieve a profitable level of operations will depend on successfully completing development, obtaining additional regulatory
approvals and achieving widespread market acceptance of its products. There can be no assurance that the Company will ever achieve
a profitable level of operations.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include those of Cerus Corporation and its subsidiary, Cerus Europe B.V.
(together with Cerus Corporation, hereinafter “Cerus” or the “Company”) after elimination of all intercompany accounts and
transactions. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the U.S. (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
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, including those related to the nature and timing of satisfaction of performance obligations, the
timing when the customer obtains control of products or services, the standalone selling price (“SSP”) of performance obligations,
variable consideration, accounts receivable, inventory reserves, fair values of investments, stock-based compensation, intangible assets
and goodwill, useful lives of intangible assets and property and equipment, income taxes, accrued liabilities, and incremental
borrowing rate, among others. The Company bases its estimates on historical experience, future projections, 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
Revenue is recognized in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with
Customers”, by applying the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations
in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and
(5) recognize revenue when (or as) the entity satisfies a performance obligation.
The Company’s main source of revenue is product revenue from sales of the INTERCEPT Blood System for platelets and plasma
(“platelet and plasma systems” or “disposable kits”), UVA illumination devices (“illuminators”), spare parts and storage solutions, and
maintenance services of illuminators. The Company sells its platelet and plasma systems directly to blood banks, hospitals,
universities, government agencies, as well as to distributors in certain regions. The Company uses a binding purchase order or signed
sales contract as evidence of a contract and satisfaction of its policy. 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. The contracts with customers can include various combinations of products, and to a lesser extent, services. The Company
must determine whether products or services are capable of being distinct and accounted for as separate performance obligations, or
are accounted for as a combined performance obligation. The Company must allocate the transaction price to each performance
obligation on a relative SSP basis, and recognize the product revenue when the performance obligation is satisfied. The Company
determines the SSP by using the historical selling price of the products and services. If the amount of consideration in a contract is
variable, the Company estimates the amount of variable consideration that should be included in the transaction price using the most
likely amount method, to the extent it is probable that a significant future reversal of cumulative product revenue under the contract
85
will not occur. Product revenue is recognized upon transfer of control of promised products or services to customers in an amount that
reflects the consideration to which the Company expects to receive in exchange for those products or services. Product revenue from
the sale of illuminators, disposable kits, spare parts and storage solutions are recognized upon the transfer of control of the products to
the customer. Product revenue from maintenance services are recognized ratably on a straight-line basis over the term of maintenance
as customers simultaneously consume and receive benefits. Freight costs charged to customers are recorded as a component of product
revenue. Taxes that the Company invoices to its customers and remits to governments are recorded on a net basis, which excludes
such tax from product revenue.
The Company receives reimbursement under its U.S. government contract with the Biomedical Advanced Research and Development
Authority (“BARDA”) that supports research and development of defined projects. See “Note 13 Development and License
Agreements—Agreement with BARDA”. The contract generally provides for reimbursement of approved costs incurred under the
terms of the contract. Revenue related to the cost reimbursement provisions under the Company’s U.S. government contract are
recognized as the qualified direct and indirect costs on the projects are incurred. The Company invoices under its U.S. government
contract using the provisional rates in the government contract and thus is subject to future audits at the discretion of government.
These audits could result in an adjustment to government contract revenue previously reported, which adjustments potentially could be
significant. The Company believes that revenue for periods not yet audited has been recorded in amounts that are expected to be
realized upon final audit and settlement. Costs incurred related to services performed under the contract are included as a component
of research and development or selling, general and administrative expenses in the Company’s consolidated statements of operations.
The Company’s use of estimates in recording accrued liabilities for government contract activities (see “Use of Estimates” above)
affects the revenue recorded from development funding and under the government contract.
Disaggregation of Product Revenue
Product revenue by geographical locations of customers during the years ended December 31, 2019, 2018 and 2017, were as follows
(in thousands):
Product revenue:
Europe, Middle East and Africa.................................................
North America............................................................................
Other...........................................................................................
Total product revenue...........................................................
$
$
52,499
20,936
1,214
74,649
$
$
46,974
12,696
1,238
60,908
$
$
36,241
6,325
1,002
43,568
2019
Year Ended December 31,
2018
2017
Contract Balances
The Company invoices its customers based upon the terms in the contracts, which generally requires payment 30 to 60 days from the
date of invoice. Accounts receivable are recorded when the Company’s right to the consideration are estimated to be unconditional.
The Company had no contract assets at December 31, 2019 and December 31, 2018.
Contract liabilities mainly consist of deferred product revenue related to maintenance services, unshipped products, and uninstalled
illuminators. Maintenance services are generally billed upfront at the beginning of each annual service period and recognized ratably
over the service period. The increase in the deferred product revenue balance for the year ended December 31, 2019, is primarily
driven by performance obligations not satisfied but invoiced as of December 31, 2019, offset by $0.5 million of revenue recognized
that were included in the deferred product revenue balance as of December 31, 2018.
The Company applies an optional exemption to not disclose the value of unsatisfied performance obligations for contracts that have an
original expected duration of one year or less.
Research and Development Expenses
Research and development (“R&D”) expenses are charged to expense when incurred, including cost incurred pursuant to the terms of
the Company’s U.S. government contract. Research and development expenses include salaries and related expenses for scientific and
regulatory personnel, payments to consultants, supplies and chemicals used in in-house laboratories, costs of R&D facilities,
86
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 R&D activities (see “Use of Estimates” above) affects the amounts
of R&D expenses recorded from development funding and under its U.S. government contract. Actual results may differ from those
estimates under different assumptions or conditions.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be
classified as cash equivalents. These investments primarily consist of money market instruments, and are classified as available-for-
sale.
Investments
Investments with original maturities of greater than three months primarily include corporate debt and U.S. government agency
securities that are designated as available-for-sale and classified as short-term investments. Available-for-sale securities are carried at
estimated fair value. The Company views its available-for-sale portfolio as available for use in its current operations. Unrealized gains
and losses derived by changes in the estimated fair value of available-for-sale securities were recorded in “Unrealized gains (losses)
on available-for-sale investments, net of taxes” on the Company’s consolidated statements of comprehensive loss. Realized gains
(losses) from the sale of available-for-sale investments, if any, were recorded in “Other income, net” on the Company’s consolidated
statements of operations. The costs of securities sold are based on the specific identification method, if applicable. The Company
reported the amortization of any premium and accretion of any discount resulting from the purchase of debt securities as a component
of interest income.
The Company also reviews its available-for-sale securities on a regular basis to evaluate whether any security has experienced an
other-than-temporary decline in fair value. Other-than-temporary declines in market value, if any, are recorded in “Other income, net”
on the Company’s consolidated statements of operations.
Restricted Cash
As of December 31, 2019 and December 31, 2018, the Company’s “Restricted cash” primarily consisted of a letter of credit relating to
the lease of the Company’s new office building. As of December 31, 2019 and December 31, 2018, the Company also had certain
non-U.S. dollar denominated deposits recorded as “Restricted cash” in compliance with certain foreign contractual requirements.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents,
available-for-sale securities and accounts receivable.
Pursuant to the Company’s investment policy, substantially all of the Company’s cash, cash equivalents and available-for-sale
securities are maintained at major financial institutions of high credit standing. The Company monitors the financial credit worthiness
of the issuers of its investments and limits the concentration in individual securities and types of investments that exist within its
investment portfolio. Generally, all of the Company’s investments carry high credit quality ratings, which is in accordance with its
investment policy. At December 31, 2019, 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. On a regular basis, including at the time of sale, the Company
performs credit evaluations of its significant customers that it expects to sell to on credit terms. Generally, the Company does not
require collateral from its customers to secure accounts receivable. To the extent that the Company determines specific invoices or
customer accounts may be uncollectible, the Company establishes an allowance for doubtful accounts against the accounts receivable
on its consolidated balance sheets and records a charge on its consolidated statements of operations as a component of selling, general
and administrative expenses.
The Company had three customers and two customers that accounted for more than 10% of the Company’s outstanding trade
receivables at December 31, 2019 and December 31, 2018, respectively. These customers cumulatively represented approximately
56% and 50% of the Company’s outstanding trade receivables at December 31, 2019 and December 31, 2018, respectively. To date,
the Company has not experienced collection difficulties from these customers.
87
Inventories
At December 31, 2019 and December 31, 2018, inventory consisted of work-in-process and finished goods only. Finished goods
include INTERCEPT disposable kits, illuminators, and certain replacement parts for the illuminators. Platelet and plasma systems’
disposable kits generally have 18 to 24 month shelf lives 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 before
being sold to, and ultimately incorporated and assembled by Fresenius Kabi Deutschland GmbH or Fresenius, Inc. (with their
affiliates, “Fresenius”) into the finished INTERCEPT disposable kits. The Company maintains an inventory balance based on its
current sales projections, and at each reporting period, the Company evaluates whether its work-in-process inventory would be sold to
Fresenius for production within the next twelve-month period and evaluates its finished units in order to sell to existing and
prospective customers within the next twelve-month period. It is not customary for the Company’s production cycle for inventory to
exceed twelve months. Instead, the Company uses its best judgment to factor in lead times for the production of its work-in-process
and finished units to meet the Company’s forecasted demands. If actual results differ from those estimates, work-in-process inventory
could potentially accumulate for periods exceeding one year. At December 31, 2019 and December 31, 2018, the Company classified
its work-in-process inventory as a current asset on its consolidated balance sheets based on its evaluation that the work-in-process
inventory would be sold to Fresenius for finished disposable kit production within each respective subsequent twelve-month period.
Inventory is recorded at the lower of cost, determined on a first-in, first-out basis, or net realizable value. The Company uses
significant judgment to analyze and determine if the composition of its inventory is obsolete, slow-moving or unsalable and frequently
reviews such determinations. The Company writes down specifically identified unusable, obsolete, slow-moving, or known unsalable
inventory that has no alternative use in the period that it is first recognized by using a number of factors including product expiration
dates, open and unfulfilled orders, and sales forecasts. Any write-down of its inventory to net realizable value establishes a new cost
basis and will be maintained even if certain circumstances suggest that the inventory is recoverable in subsequent periods. Costs
associated with the write-down of inventory are recorded in “Cost of product revenue” on the Company’s consolidated statements of
operations. At December 31, 2019 and December 31, 2018, the Company had $0.1 million and $0.3 million, respectively, recorded for
potential obsolete, expiring or unsalable product.
Property and Equipment, net
Property and equipment is comprised of furniture, equipment, leasehold improvements, construction-in-progress, 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. As of December 31, 2019 and December 31, 2018, the Company capitalized construction-in-progress costs included in
“Property and Equipment, net” on the Company’s consolidated balance sheets, of zero and $6.9 million, respectively, related to
leasehold improvements. As of December 31, 2019 and December 31, 2018, the Company had receivables included in “Prepaid and
other current assets” on the Company's consolidated balance sheets, of zero and $1.2 million, respectively, related to its new office
building.
Goodwill and Intangible Assets, net
Intangible assets, net, which include a license for the right to commercialize the INTERCEPT Blood System in Asia, are subject to
ratable amortization over the original estimated useful life of ten years. Accumulated amortization of intangible assets as of
December 31, 2019 and December 31, 2018, was $1.9 million and $1.7 million, respectively. Goodwill is not amortized but instead is
subject to an impairment test performed on an annual basis, or more frequently if events or changes in circumstances indicate that
goodwill may be impaired. Such impairment analysis is performed on August 31 of each fiscal year, or more frequently if indicators
of impairment exist. The test for goodwill impairment may be assessed using qualitative factors to determine whether it is more likely
than not that the fair value of a reporting unit is less than the carrying amount. If the Company determines that it is more likely than
not that the fair value of a reporting unit is less than the carrying amount, the Company must then proceed with performing the
quantitative goodwill impairment test. The Company may choose not to perform the qualitative assessment to test goodwill for
impairment and proceed directly to the quantitative impairment test; however, the Company may revert to the qualitative assessment
to test goodwill for impairment in any subsequent period. The quantitative goodwill impairment test compares the fair value of each
reporting unit with its respective carrying amount, including goodwill. The Company has determined that it operates in one reporting
unit and estimates the fair value of its one reporting unit using the enterprise approach under which it considers the quoted market
capitalization of the Company as reported on the Nasdaq Global Market. The Company considers quoted market prices that are
available in active markets to be the best evidence of fair value. The Company also considers other factors, which include future
forecasted results, the economic environment and overall market conditions. If the fair value of the reporting unit exceeds its carrying
amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of the reporting unit’s goodwill exceeds the
88
implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess, limited to the carrying amount
of goodwill in the Company’s one reporting unit.
The Company performs an impairment test on its intangible assets if certain events or changes in circumstances occur which indicate
that the carrying amounts of its intangible assets may not be recoverable. If the intangible assets are not recoverable, an impairment
loss would be recognized by the Company based on the excess amount of the carrying value of the intangible assets over its fair value.
During the year ended December 31, 2019, 2018 and 2017, there were no impairment charges recognized related to the acquired
intangible assets.
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.
Foreign Currency Remeasurement
The functional currency of the Company’s foreign subsidiary is the U.S. dollar. Monetary assets and liabilities denominated in foreign
currencies are remeasured in U.S. dollars using the exchange rates at the balance sheet date. Non-monetary assets and liabilities
denominated in foreign currencies are remeasured in U.S. dollars using historical exchange rates. Product revenues and expenses are
remeasured using average exchange rates prevailing during the period. Remeasurements are recorded in the Company’s consolidated
statements of operations.
Stock-Based 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 recognizes stock-based compensation expense for the grant date fair
value of the vested portion of the awards in its consolidated statements of operations.
See Note 11 for further information regarding the Company’s stock-based compensation assumptions and expenses.
Income Taxes
The provision for income taxes is accounted for using an asset and liability approach, under which 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. The Company does not recognize 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 is not an appropriate substitute for derecognition of a tax position. 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 consolidated statements of operations, nor has it accrued for or made
payments for interest and penalties. 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 U.S. federal tax returns for years 1999 through 2018, California tax returns for years through
2018, and Netherlands tax returns for years 2015 through 2018 remain subject to examination by the taxing jurisdictions due to
unutilized net operating losses and research credits. The Company continues to carry a valuation allowance on substantially all of its
net deferred tax assets.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the
period. Diluted net loss per share gives effect to all potentially dilutive common shares outstanding for the period. The potentially
dilutive securities include stock options, employee stock purchase plan rights and restricted stock units, which are calculated using the
treasury stock method.
89
For the years ended December 31, 2019, 2018 and 2017, all potentially dilutive securities outstanding have been excluded from the
computation of dilutive weighted average shares outstanding because such securities have an antidilutive impact due to losses
reported.
The following table sets forth the reconciliation of the numerator and denominator used in the computation of basic and diluted net
loss per share for the years ended December 31, 2019, 2018 and 2017 (in thousands, except per share amounts):
2019
Year Ended December 31,
2018
2017
Numerator for Basic and Diluted:
Net loss used for basic calculation ............................................................................ $
(71,244) $
(57,564) $
(60,585)
Denominator:
Basic weighted average number of shares outstanding .............................................
Effect of dilutive potential shares..............................................................................
Diluted weighted average number of shares outstanding..........................................
139,831
—
139,831
131,663
—
131,663
108,221
—
108,221
Net loss per share:
Basic and diluted ....................................................................................................... $
(0.51) $
(0.44) $
(0.56)
The table below presents potential shares that were excluded from the calculation of the weighted average number of shares
outstanding used for the calculation of diluted net loss per share. These are excluded from the calculation due to their anti-dilutive
effect for the years ended December 31, 2019, 2018 and 2017 (shares in thousands):
Weighted average number of anti-dilutive potential shares:
Stock options .............................................................................................................
Restricted stock units.................................................................................................
Employee stock purchase plan rights ........................................................................
Total.....................................................................................................................
17,401
3,361
72
20,834
18,031
1,902
20
19,953
17,373
1,225
21
18,619
2019
2018
2017
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use
(“ROU”) assets and operating lease liabilities in the Company’s consolidated balance sheets. As of December 31, 2019 and
December 31, 2018, the Company did not have finance leases.
ROU assets and operating lease liabilities are recognized at commencement date based on the present value of lease payments over the
lease term. The Company uses its incremental borrowing rate based on the information available at commencement date in
determining the present value of lease payments. The ROU asset also includes any lease payments made and excludes lease
incentives. The lease terms may include options to extend or terminate the lease when it is reasonably certain to be exercised.
Operating leases are recognized on a straight-line basis over the lease term.
Guarantee and Indemnification Arrangements
The Company recognizes the fair value for guarantee and indemnification arrangements issued or modified by the Company. In
addition, the Company monitors the conditions that are subject to the guarantees and indemnifications in order to identify if a loss has
occurred. If the Company determines it is probable that a loss has occurred, then any such estimable loss would be recognized under
those guarantees and indemnifications. Some of the agreements that the Company is a party to contain provisions that indemnify the
counter party from damages and costs resulting from claims that the Company’s technology infringes the intellectual property rights of
a third-party or claims that the sale or use of the Company’s products have caused personal injury or other damage or loss. The
Company has not received any such requests for indemnification under these provisions and has not been required to make material
payments pursuant to these provisions.
The Company generally provides for a one-year warranty on certain of its INTERCEPT blood-safety products covering defects in
materials and workmanship. The Company accrues costs associated with warranty obligations when claims become known and are
estimable. The Company has not experienced significant or systemic warranty claims nor is it aware of any existing current warranty
claims. Accordingly, the Company had not accrued for any future warranty costs for its products at December 31, 2019 and
December 31, 2018.
90
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 its debt
approximates their carrying amounts. The Company measures and records certain financial assets and liabilities at fair value on a
recurring basis, including its available-for-sale securities. The Company classifies instruments within Level 1 if quoted prices are
available in active markets for identical assets, which include the Company’s cash accounts and money market funds. 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 corporate debt and U.S. government agency securities holdings. The available-for-sale securities are held by a
custodian who obtains investment prices from a third-party pricing provider that uses standard inputs (observable in the market) to
models which vary by asset class. The Company classifies instruments in Level 3 if one or more significant inputs or significant value
drivers are unobservable. The Company assesses any transfers among fair value measurement levels at the end of each reporting
period.
See Note 3 for further information regarding the Company’s valuation of financial instruments.
New Accounting Pronouncements
Recently adopted accounting pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases, which, for operating leases, requires a lessee to recognize a right-of-
use asset and a lease liability, initially measured at the present value of the lease payments, in its consolidated balance sheet. The
standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term,
on a generally straight-line basis. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements,
which provides for certain practical expedient when implementing the new leases standard. The Company adopted the new accounting
standard on January 1, 2019, using the modified retrospective method and elected the package of practical expedients for expired or
existing contracts, which allowed the Company not to reassess (1) whether contracts are or contain leases, (2) lease classification and
(3) initial direct costs. The Company recorded right-of-use assets of $2.4 million in “Operating lease right-of-use assets” in the
Company's consolidated balance sheets, and lease liabilities of $2.4 million in aggregate in “Operating lease liabilities – current” and
“Operating lease liabilities – non-current” in the Company’s consolidated balance sheets on the adoption date. The comparative
information has not been restated and continues to be reported under the accounting standards in effect for those periods.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which eliminates certain
exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income
taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies
aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that
result in a step-up in the tax basis of goodwill. The standard is effective for annual periods beginning after December 15, 2020, and
interim periods thereafter, with early application permitted. The Company elected to early adopt the new standard prospectively at the
beginning of the fourth quarter of 2019. The adoption of this ASU had no material impact on the Company’s consolidated financial
statements.
Recently issued accounting pronouncements not yet adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. The
standard is effective for annual periods beginning after December 15, 2019, and interim periods thereafter, with early application
permitted. The Company plans to adopt this ASU on January 1, 2020, using the modified retrospective method. The adoption of this
ASU is not expected to have a material impact on the Company’s consolidated financial statements.
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Note 3. Available-for-sale Securities and Fair Value on Financial Instruments
Available-for-sale Securities
The following is a summary of available-for-sale securities at December 31, 2019 (in thousands):
Money market funds........................................................................... $
United States government agency securities ......................................
Corporate debt securities ....................................................................
Total available-for-sale securities .............................................. $
8,860 $
15,545
35,073
59,478 $
— $
16
98
114 $
— $
—
—
— $
8,860
15,561
35,171
59,592
Amortized Cost
Gross
Unrealized Gain
Gross
Unrealized Loss
Fair Value
December 31, 2019
The following is a summary of available-for-sale securities at December 31, 2018 (in thousands):
Money market funds........................................................................... $
United States government agency securities ......................................
Corporate debt securities ....................................................................
Total available-for-sale securities .............................................. $
6,167 $
15,971
73,028
95,166 $
— $
—
2
2 $
— $
(23)
(260)
(283) $
6,167
15,948
72,770
94,885
Amortized Cost
Gross
Unrealized Gain
Gross
Unrealized Loss
Fair Value
December 31, 2018
Available-for-sale securities at December 31, 2019 and 2018, consisted of the following by contractual maturity (in thousands):
One year or less .................................................................................. $
Greater than one year and less than five years ...................................
Total available-for-sale securities .............................................. $
43,822 $
15,656
59,478 $
43,907 $
15,685
59,592 $
85,227 $
9,939
95,166 $
84,957
9,928
94,885
December 31, 2019
December 31, 2018
Amortized Cost
Fair Value
Amortized Cost
Fair Value
As of December 31, 2019, the Company did not have any available-for-sale securities in an unrealized net loss position. The following
tables show all available-for-sale marketable securities in an unrealized loss position for which an other-than-temporary impairment
has not been recognized and the related gross unrealized losses and fair value, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position (in thousands):
Less than 12 Months
December 31, 2018
12 Months or Greater
Total
Fair Value
Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
United States government agency
securities ................................................ $
Corporate debt securities........................
Total available-for-sale securities .... $
14,948 $
60,813
75,761 $
(22) $
(231)
(253) $
999 $
9,976
10,975 $
(1) $
(29)
(30) $
15,947 $
70,789
86,736 $
(23)
(260)
(283)
The Company typically invests in highly-rated securities, and its investment policy limits the amount of credit exposure to any one
issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk
of principal loss. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment
for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been
below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates, and the Company’s
intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s cost
basis. During the years ended December 31, 2019, 2018 and 2017, the Company did not recognize any other-than-temporary
impairment loss. The Company has no current requirement or intent to sell the securities in an unrealized loss position. The Company
expects to recover up to (or beyond) the initial cost of investment for securities held.
92
During the years ended December 31, 2019, 2018 and 2017, the Company sold zero, zero and 346,700 shares of Aduro Biotech, Inc.,
or Aduro, common stock, respectively, and recognized zero, zero, and $3.5 million gross realized gains, respectively, which were
reclassified out of accumulated other comprehensive income into “Other income, net” on the Company’s consolidated statements of
operations. As of December 31, 2019 and 2018, the Company had no remaining investment in Aduro’s common stock. The Company
did not record any gross realized losses during the years ended December 31, 2019, 2018 and 2017.
Fair Value Disclosures
The Company uses certain assumptions that market participants would use to determine the fair value of an asset or liability in pricing
the asset or liability in an orderly transaction between market participants at the measurement date. The identification of market
participant assumptions provides a basis for determining what inputs are to be used for pricing each asset or liability. A fair value
hierarchy has been established which gives precedence to fair value measurements calculated using observable inputs over those using
unobservable inputs. This hierarchy prioritized the inputs into three broad levels as follows:
•
•
•
Level 1: Quoted prices in active markets for identical instruments
Level 2: Other significant observable inputs (including quoted prices in active markets for similar instruments)
Level 3: Significant unobservable inputs (including assumptions in determining the fair value of certain investments)
Money market funds are highly liquid investments and are actively traded. The pricing information on these investment instruments
are readily available and can be independently validated as of the measurement date. This approach results in the classification of
these securities as Level 1 of the fair value hierarchy.
To estimate the fair value of Level 2 debt securities as of December 31, 2019, the Company’s primary pricing service relies on inputs
from multiple industry-recognized pricing sources to determine the price for each investment. Corporate debt and U.S. government
agency securities are systematically priced by this service as of the close of business each business day. If the primary pricing service
does not price a specific asset a secondary pricing service is utilized.
The fair values of the Company’s financial assets and liabilities were determined using the following inputs at December 31, 2019 (in
thousands):
Balance sheet
classification
Cash and cash
equivalents
Money market funds..................................
United States government agency
securities .................................................... Short-term investments
Corporate debt securities ........................... Short-term investments
$
Total financial assets .........................
$
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
8,860 $
8,860 $
— $
15,561
35,171
59,592 $
—
—
8,860 $
15,561
35,171
50,732 $
—
—
—
—
The fair values of the Company’s financial assets and liabilities were determined using the following inputs at December 31, 2018 (in
thousands):
Balance sheet
classification
Cash and cash
equivalents
Money market funds..................................
United States government agency
securities .................................................... Short-term investments
Corporate debt securities ........................... Short-term investments
$
Total financial assets .........................
$
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
6,167 $
6,167 $
— $
15,948
72,770
94,885 $
—
—
6,167 $
15,948
72,770
88,718 $
—
—
—
—
The Company did not have any transfers among fair value measurement levels during the years ended December 31, 2019 and 2018.
93
Note 4. Inventories
Inventories at December 31, 2019 and 2018, consisted of the following (in thousands):
Work-in-process ..................................................................................................................... $
Finished goods........................................................................................................................
Total inventories ............................................................................................................... $
5,160 $
14,330
19,490 $
3,075
10,464
13,539
December 31,
2019
2018
Note 5. Property and Equipment, net
Property and equipment, net at December 31, 2019 and 2018, consisted of the following (in thousands):
Construction-in-progress ........................................................................................................ $
Machinery and equipment ......................................................................................................
Computer equipment and software ........................................................................................
Furniture and fixtures .............................................................................................................
Leasehold improvements........................................................................................................
Consigned equipment .............................................................................................................
Total property and equipment, gross ................................................................................
Accumulated depreciation and amortization..........................................................................
Total property and equipment, net.................................................................................... $
December 31,
2019
2018
74 $
2,833
3,306
2,061
12,881
1,373
22,528
(7,630)
14,898 $
6,864
1,945
2,915
901
5,715
1,299
19,639
(11,509)
8,130
Depreciation and amortization expense related to property and equipment, net was $2.2 million, $1.1 million and $1.2 million for the
years ended December 31, 2019, 2018 and 2017, respectively. There were no impairments for long-lived assets for the years ended
December 31, 2019, 2018 and 2017.
Note 6. Goodwill and Intangible Assets, net
Goodwill
During the year ended December 31, 2019, the Company did not dispose of or recognize additional goodwill. On August 31, 2019, the
Company performed its impairment test of goodwill. As described in Note 2 above, the Company applied the enterprise approach by
reviewing the quoted market capitalization of the Company as reported on the Nasdaq Global Market 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.
Intangible Assets, net
The following is a summary of intangible assets, net at December 31, 2019 (in thousands):
Acquisition-related intangible assets:
Reacquired license - INTERCEPT Asia .............................................................. $
2,017 $
(1,885) $
132
Gross
Carrying
Amount
December 31, 2019
Accumulated
Amortization
Net
Carrying
Amount
94
The following is a summary of intangible assets, net at December 31, 2018 (in thousands):
Gross
Carrying
Amount
December 31, 2018
Accumulated
Amortization
Net
Carrying
Amount
Acquisition-related intangible assets:
Reacquired license - INTERCEPT Asia .............................................................. $
2,017 $
(1,683) $
334
During the years ended December 31, 2019, 2018 and 2017, there were no impairment charges recognized related to the Company’s
intangible assets.
At December 31, 2019, the expected remaining annual amortization expense of the intangible assets, net is $0.1 million for the year
ending December 31, 2020.
Note 7. Accrued Liabilities
Accrued liabilities at December 31, 2019 and 2018, consisted of the following (in thousands):
Accrued compensation and related costs ............................................................................... $
Accrued professional services ................................................................................................
Accrued development costs....................................................................................................
Other accrued expenses ..........................................................................................................
Total accrued liabilities..................................................................................................... $
12,703 $
3,489
1,468
3,291
20,951 $
10,765
4,544
1,965
2,526
19,800
December 31,
2019
2018
Note 8. Debt
Debt at December 31, 2019, consisted of the following (in thousands):
Term Loan Credit Agreement............................................................................ $
Less: debt – current............................................................................................
Debt – non-current ............................................................................................. $
40,000 $
—
40,000 $
(586) $
—
(586) $
39,414
—
39,414
Principal
December 31, 2019
Unamortized
Discount
Net Carrying
Value
Debt at December 31, 2018, consisted of the following (in thousands):
Oxford Term Loan Agreement .......................................................................... $
Less: debt – current............................................................................................
Debt – non-current ............................................................................................. $
30,000 $
(7,857)
22,143 $
(130) $
—
(130) $
29,870
(7,857)
22,013
Principal
December 31, 2018
Unamortized
Discount
Net Carrying
Value
95
Principal, interest and fee payments on Term Loan Credit Agreement at December 31, 2019, are expected to be as follows (in
thousands):
Year ended December 31,
Principal
Interest and Fees
Total
2020 .............................................................................................................. $
2021 ..............................................................................................................
2022 ..............................................................................................................
2023 ..............................................................................................................
2024 ..............................................................................................................
Total ........................................................................................................ $
— $
—
15,000
20,000
5,000
40,000 $
3,050
3,042
2,660
1,203
1,264
11,219 $
3,050
3,042
17,660
21,203
6,264
51,219
Loan Agreements
Prior to March 29, 2019, the Company maintained a loan and security agreement (the “Oxford Term Loan Agreement”) with Oxford
Finance LLC (“Oxford”). The Oxford Term Loan Agreement provided for secured growth capital term loans of up to $40.0 million.
The Oxford Term Loan Agreement was available in two tranches. The first tranche of $30.0 million (“2017 Term Loan A”) was
drawn by the Company on July 31, 2017, with the proceeds used in part to repay in full all of the outstanding term loans under the
previous Term Loan Agreement of $17.6 million and the final payment of the previous Term Loan Agreement of $1.4 million. The
availability of the second tranche of $10.0 million (“2017 Term Loan B”) expired on May 14, 2018, and the Company did not elect to
draw the 2017 Term Loan B.
On March 29, 2019 (the “Closing Date”), the Company entered into a Credit, Security and Guaranty Agreement (Term Loan) (the
“Term Loan Credit Agreement”) with MidCap Financial Trust (“MidCap”) to borrow up to $70 million in three tranches (collectively
“2019 Term Loan”), with a maturity date of March 1, 2024. The first advance of $40.0 million (“Tranche 1”) was drawn by the
Company on March 29, 2019, with the proceeds used in part to repay in full the outstanding term loans and fees under the Oxford
Term Loan Agreement. The Company repaid principal and interest in an aggregate amount equal to approximately $31.2 million and
prepayment fees in an aggregate amount equal to approximately $0.6 million, and terminated all obligations under the Oxford Term
Loan Agreement. As a result, the Company recorded a loss of $2.1 million on the extinguishment of Oxford term loans in “Interest
expense” on the Company's consolidated statements of operations. The second advance of $15.0 million (“Tranche 2”) will be
available to the Company from January 1, 2020 through December 31, 2020, subject to the Company’s satisfaction of certain
conditions described in the Term Loan Credit Agreement, and (ii) the third advance of $15.0 million (“Tranche 3”) will be available to
the Company starting April 1, 2020, through March 31, 2021, subject to the Company’s satisfaction of certain other conditions
described in the Term Loan Credit Agreement. The borrowings under the 2019 Term Loan bears interest at the sum of a fixed
percentage spread and the greater of (i) 1.8% or (ii) one month LIBOR. The effective interest rate on the Term Loan at December 31,
2019 was approximately 7.50%. All three tranches require interest only payments through March 1, 2022, followed by 24 months of
payments with interest and equal payment of principal. The interest only payment period can be extended for 12 months upon
achievement of a specified trailing twelve month net revenue target. Prepayments of the 2019 Term Loan under the Term Loan Credit
Agreement, in whole or in part, will be subject to early termination fees which decline each year until the fourth anniversary of the
applicable funding date, at which time there is no early termination fee. Upon the final payment, the Company must also pay an exit
fee calculated based on a percentage of the aggregate principal amount of all tranches advanced to the Company.
The Company also entered into a Credit, Security and Guaranty Agreement (Revolving Loan) (the “Revolving Loan Credit
Agreement”) with MidCap on March 29, 2019, to initially borrow up to $5.0 million. The amount borrowed under the Revolving Loan
Credit Agreement can be increased, upon request by the Company by up to an additional $15.0 million, subject to agent and lender
approval and the satisfaction of certain conditions. The Revolving Loan Credit Agreement has a maturity date of March 1, 2024.
Amounts drawn under the Revolving Loan Credit Agreement bear interest at the sum of a fixed percentage spread and the greater of
(i) 1.80% or (ii) one month LIBOR. There are also fractional fees based on the amounts either drawn or undrawn. If the Revolving
Loan Credit Agreement is terminated before maturity or the funding obligation is permanently reduced, there are termination fees
which decline each anniversary until the third anniversary, at which time there is no termination fee. As of December 31, 2019, the
Company had borrowed $5.0 million under the Revolving Loan Credit Agreement, which is included in “Debt – current” in the
Company’s consolidated balance sheets.
The Term Loan Credit Agreement and Revolving Loan Credit Agreement contain certain financial and non-financial covenants, with
which the Company was in compliance at December 31, 2019. Additionally, both agreements are secured by substantially all of the
Company’s assets, with some exclusions.
96
Note 9. Commitments and Contingencies
Operating Leases
The Company leases its office facilities, located in Concord, California and Amersfoort, the Netherlands, and certain equipment and
automobiles under non-cancelable operating leases with initial terms in excess of one year that require the Company to pay operating
costs, property taxes, insurance and maintenance. The operating leases expire at various dates through 2030, with certain of the leases
providing for renewal options, provisions for adjusting future lease payments based on the consumer price index, and the right to
terminate the lease early. The Company does not assume renewals in determination of the lease term unless the renewals are deemed
to be reasonably assured at lease commencement. The Company recorded the lease right-of-use asset and obligation at the present
value of lease payments over the lease term. The rates implicit in the Company’s leases are generally not readily determinable. The
Company must estimate its incremental borrowing rate to discount the lease payments to present value. Operating lease assets also
include lease incentives.
Supplemental cash flow information related to operating leases is as follows (dollars in thousands):
Cash payments for operating leases ..........................................................................................................
Right-of-use assets obtained in exchange for operating lease obligations................................................
$
3,204
13,417
Year Ended
December 31, 2019
Weighted-average remaining lease term ..................................................................................................
Weighted-average discount rate ...............................................................................................................
December 31, 2019
9.3 years
8.9%
Future minimum non-cancelable payments under operating leases as of December 31, 2019, were as follows (in thousands):
Years ended December 31,
2020 ................................................................................................................................................................. $
2021 .................................................................................................................................................................
2022 .................................................................................................................................................................
2023 .................................................................................................................................................................
2024 .................................................................................................................................................................
Thereafter ........................................................................................................................................................
Total future lease payments.............................................................................................................................
Less imputed interest.......................................................................................................................................
Present value of lease liabilities ...................................................................................................................... $
Operating Leases
3,307
3,297
2,884
2,741
2,706
16,053
30,988
10,969
20,019
During the years ended December 31, 2019, 2018 and 2017, the Company recorded operating lease expenses of $3.4 million, $1.6
million and $1.4 million, respectively. As of December 31, 2019, the Company had no leases that have not yet commenced.
Purchase Commitments
The Company is party to agreements with certain providers for certain components of the INTERCEPT Blood System. Certain of
these agreements require minimum purchase commitments from the Company. The Company has paid $13.7 million, $10.0 million
and $6.7 million for goods under agreements which are subject to minimum purchase commitments during the years ended
December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, the Company had future minimum purchase
commitments under these agreements of approximately $9.7 million, $2.9 million, $0.2 million, $0.2 million, and $0.6 million for the
years ending December 31, 2020, 2021, 2022, 2023, and 2024, respectively.
Note 10. Stockholders’ Equity
Sales Agreement
On August 4, 2017, the Company entered into Amendment No. 3 to the Controlled Equity Offering SM Sales Agreement with Cantor
Fitzgerald & Co.(as amended on August 4, 2017, the “Amended Cantor Agreement”). The Amended Cantor Agreement became
effective on January 8, 2018, and provided for the issuance and sale of shares of the Company’s common stock having an aggregate
offering price of up to $70.0 million through Cantor Fitzgerald & Co. (“Cantor”), which amount included the $31.4 million of unsold
shares of common stock available for sale immediately prior to the effectiveness of the Amended Cantor Agreement. Under the
Amended Cantor Agreement, Cantor also acts as the Company’s sales agent and receives compensation based on an aggregate of 2%
97
of the gross proceeds on the sale price per share of its common stock. The issuance and sale of these shares by the Company pursuant
to the Amended Cantor Agreement are deemed an “at-the-market” offering and are registered under the Securities Act of 1933, as
amended. During the year ended December 31, 2019, 5.6 million shares of the Company’s common stock were sold under the
Amended Cantor Agreement for aggregate net proceeds of $26.9 million. During the year ended December 31, 2018, 4.2 million
shares of the Company’s common stock were sold under the Amended Cantor Agreement for net proceeds of $27.9 million. At
December 31, 2019, the Company had approximately $14.1 million of common stock available to be sold under the Amended Cantor
Agreement.
Note 11. Stock-Based Compensation
Employee Stock Plans
Employee Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan (the “Purchase Plan”), which is intended to qualify as an employee stock
purchase plan within the meaning of Section 423(b) of the Internal Revenue Code. Under the Purchase Plan, the Company’s Board of
Directors may authorize participation by eligible employees, including officers, in periodic offerings. Under the Purchase Plan eligible
employee participants may purchase shares of common stock of the Company at a purchase price equal to 85% of the lower of the fair
market value per share on the start date of the offering period or the fair market value per share on the purchase date. The Purchase
Plan consists of a fixed offering period of 12 months with two purchase periods within each offering period. At December 31, 2019,
the Company had 0.6 million shares available for future issuance.
2008 Equity Incentive Plan and Inducement Plan
The Company also maintains an equity compensation plan to provide long-term incentives for employees, contractors, and members
of its Board of Directors. The Company currently grants equity awards from one plan, the 2008 Equity Incentive Plan and its
subsequent amendments (collectively, the Amended “2008 Plan”). The Amended 2008 Plan allows for the issuance of non-statutory
and incentive stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights, other stock-related awards, and
performance awards which may be settled in cash, stock, or other property. On June 5, 2019, the Company’s stockholders approved an
amendment and restatement of the 2008 Plan that increased the aggregate number of shares of common stock authorized for issuance
under the 2008 Plan by 11,800,000 shares. Option awards under the Amended 2008 Plan generally have a maximum term of 10 years
from the date of the award. The Amended 2008 Plan generally requires options to be granted at 100% of the fair market value of the
Company’s common stock subject to the option on the date of grant. Options granted by the Company to employees generally vest
over four years. RSUs are measured based on the fair market value of the underlying stock on the date of grant. RSUs granted by the
Company to employees generally vest over three to four years. Performance-based stock or cash awards granted under the Amended
2008 Plan are limited to either 500,000 shares of common stock or $1.0 million per recipient per calendar year. At December 31,
2019, 35,000 performance-based stock awards were outstanding.
At December 31, 2019, the Company had an aggregate of approximately 31.4 million shares of its common stock subject to
outstanding options or unvested RSUs, or remaining available for future issuance under the Amended 2008 Plan, of which
approximately 16.8 million shares and 4.1 million shares were subject to outstanding options and unvested RSUs, respectively, and
approximately 10.5 million shares were available for future issuance under the Amended 2008 Plan. The Company’s policy is to issue
new shares of common stock upon the exercise of options or vesting of RSUs.
Activity under the Company’s equity incentive plans related to stock options is set forth below (in thousands except per share
amounts):
Balances at December 31, 2018 ..........................................................................
Granted...........................................................................................................
Exercised........................................................................................................
Forfeited/canceled..........................................................................................
Balances at December 31, 2019 ..........................................................................
17,560 $
515
(690)
(555)
16,830
4.47
5.68
3.11
5.46
4.53
Number of
Options Outstanding
Weighted
Average
Exercise
Price per
Share
98
Activity under the Company’s equity incentive plans related to RSUs is set forth below (in thousands except per share amounts):
Balances at December 31, 2018 ..........................................................................
Granted (1).......................................................................................................
Vested.............................................................................................................
Forfeited .........................................................................................................
Balances at December 31, 2019 ..........................................................................
(1)
Includes shares issuable under performance-based restricted stock unit awards.
Number of
RSUs
Unvested
Weighted
Average
Grant Date
Fair Value
per Share
2,001 $
3,207
(883)
(227)
4,098
4.56
5.56
4.69
5.93
5.24
The total fair value of RSUs as of their respective vesting dates, for the years ended December 31, 2019, 2018 and 2017, were $5.6
million, $2.8 million and $1.0 million, respectively.
Information regarding the Company’s stock options outstanding, stock options vested and expected to vest, and stock options
exercisable at December 31, 2019, was as follows (in thousands except weighted average exercise price and contractual term):
Number of Shares
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Term
(Years)
Aggregate
Intrinsic
Value
Balances at December 31, 2019 ............................................
Stock options outstanding ................................................
Stock options vested and expected to vest .......................
Stock options exercisable.................................................
$
16,830
16,749
13,751
4.53
4.53
4.49
5.5
5.4
4.9
$
4,169
4,168
4,077
The aggregate intrinsic value in the table above is calculated as the difference between the exercise price of the stock option and the
Company’s closing stock price on the last trading day of each respective fiscal period.
The total intrinsic value of options exercised for the years ended December 31, 2019, 2018 and 2017, was $1.6 million, $7.1 million
and $0.6 million, respectively. The total intrinsic value of exercised stock options is calculated based on the difference between the
exercise price and the quoted market price of the Company’s common stock as of the close of the exercise date.
Stock-based Compensation Expense
Stock-based compensation expense recognized on the Company’s consolidated statements of operations for the years ended
December 31, 2019, 2018 and 2017, was as follows (in thousands):
Research and development...............................................................
Selling, general and administrative ..................................................
Total stock-based compensation expense ...................................
$
$
Year Ended December 31,
2019
2018
2017
2,472
10,840
13,312
$
$
1,669
8,725
10,394
$
$
1,323
8,032
9,355
Stock-based compensation expense in the above table does not reflect any income taxes as the Company has experienced a history of
net losses since its inception and has a nearly full valuation allowance on its deferred tax assets. In addition, there was neither income
tax benefits realized related to stock-based compensation expense nor any stock-based compensation costs capitalized as part of an
asset during the years ended December 31, 2019, 2018 and 2017. The Company has also not recorded any stock-based compensation
associated with performance-based stock options during the years ended December 31, 2019, 2018 and 2017.
As of December 31, 2019, the Company expects to recognize the remaining unamortized stock-based compensation expense of $6.0
million and $14.1 million, respectively, related to non-vested stock options and RSUs, net of estimated forfeitures, over an estimated
remaining weighted average period of 1.8 years and 1.9 years, respectively.
99
Valuation Assumptions for Stock-based Compensation
The Company uses the Black-Scholes option pricing model to determine the grant-date fair value of stock options and employee stock
purchase plan rights. The Black-Scholes option-pricing model is affected by the Company’s stock price, as well as assumptions
regarding a number of complex and subjective variables, which include the expected term of the grants, actual and projected employee
stock option exercise behaviors, including forfeitures, the Company’s expected stock price volatility, the risk-free interest rate and
expected dividends. The Company recognizes the grant-date fair value of the stock award as stock-based compensation expense on a
straight-line basis over the requisite service period, which is the vesting period, and is adjusted for estimated forfeitures.
The expected life of the stock options is based on observed historical exercise patterns. Groups of employees having similar historical
exercise behavior are considered separately for valuation purposes. The Company estimates stock option forfeitures based on
historical data for employee groups. The total number of stock options expected to vest is adjusted by actual and estimated forfeitures.
The expected volatility is estimated by using historical volatility of the Company’s common stock. The risk-free interest rate is based
on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term commensurate with the expected term of the option.
The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of
zero.
The weighted average assumptions used to value the Company’s stock-based awards for the years ended December 31, 2019, 2018
and 2017, was as follows:
Stock Options:
Expected term (in years)...................................................................
Estimated volatility...........................................................................
Risk-free interest rate........................................................................
Expected dividend yield ...................................................................
Employee Stock Purchase Plan Rights:
Expected term (in years)...................................................................
Estimated volatility...........................................................................
Risk-free interest rate........................................................................
Expected dividend yield ...................................................................
2019
5.59
50%
2.32%
0%
0.80
46%
2.04%
0%
Year Ended December 31,
2018
6.07
50%
2.72%
0%
0.74
47%
2.34%
0%
2017
6.12
47%
2.14%
0%
0.92
57%
1.08%
0%
The weighted average grant-date fair value of stock options granted during the years ended December 31, 2019, 2018 and 2017, was
$2.73 per share, $2.41 per share and $1.98 per share, respectively. The weighted average grant-date fair value of employee stock
purchase rights during the years ended December 31, 2019, 2018 and 2017, was $1.84 per share, $2.29 per share and $1.18 per share,
respectively.
Note 12. Retirement Plan
The Company maintains a defined contribution savings plan (the “401(k) Plan”) that qualifies under the provisions of Section 401(k)
of the Internal Revenue Code and covers eligible U.S. employees of the Company. Under the terms of the 401(k) Plan, eligible U.S.
employees may make pre-tax dollar or post-tax (Roth) contributions of up to 60% of their eligible pay up to a maximum cap
established by the IRS. The Company may contribute a discretionary percentage of qualified individual employee’s salaries, as
defined, to the 401(k) Plan. In 2019, the Company began providing a 401(k) match, subject to certain limitations. Under the 401(k)
match, the Company matches 50% of the first 6% of each employee’s 401(k) contribution, up to an annual maximum of $5,000. The
employer match will vest immediately.
Note 13. Development and License Agreements
Agreements with Fresenius
Fresenius Kabi AG (“Fresenius”) manufactures and supplies the platelet and plasma systems to the Company under a supply
agreement (the “Supply Agreement”). Fresenius is obligated to sell, and the Company is obligated to purchase, finished disposable
kits for the Company’s platelet and plasma systems and the Company’s red blood cell system product candidate (the “RBC Sets”).
The Supply Agreement permits the Company to purchase platelet and plasma systems and RBC Sets from third parties to the extent
necessary to maintain supply qualifications with such third parties or where local or regional manufacturing is needed to obtain
product registrations or sales. Pricing terms per unit are initially fixed and decline at specified annual production levels, and are
100
subject to certain adjustments after the initial pricing term. Under the Supply Agreement, the Company maintains the amounts due
from the components sold to Fresenius as a current asset on its accompanying consolidated balance sheets until such time as the
Company purchases finished disposable kits using those components.
The Supply Agreement also required the Company to make certain payments totaling €8.6 million (“Manufacturing and Development
Payments”) to Fresenius. Because these payments represented unconditional payment obligations, the Company recognized its
liability for these payments at their net present value at discount rate of 9.72% based on the Company’s effective borrowing rate at
that time. The Manufacturing and Development Payments liability was accreted through interest expense based on the estimated
timing of its ultimate settlement. In 2016, the Company paid €3.1 million to Fresenius. In August 2019, the Company paid the
remaining €5.5 million to Fresenius.
The Supply Agreement also required the Company to make payments to support certain projects Fresenius has and will perform on
behalf of the Company related to certain R&D activities and manufacturing efficiency activities for which certain assets have been
established in the Company’s consolidated balance sheets. The manufacturing efficiency asset is expensed on a straight line basis over
the life of the Supply Agreement. The prepaid asset related to amounts paid up front for the R&D activities to be conducted by
Fresenius on behalf of the Company is expensed over the period which such activities occur. The following table summarizes the
amounts of prepaid R&D asset and manufacturing efficiency asset at December 31, 2019 and 2018(in thousands).
Prepaid R&D asset – current (1) ............................................................................................. $
Prepaid R&D asset – non-current (2) ......................................................................................
Manufacturing efficiency asset (2) ..........................................................................................
54 $
2,094
1,349
December 31, 2019
December 31, 2018
47
2,156
1,594
(1)
(2)
Included in “Prepaid and other current assets” in the Company's consolidated balance sheets.
Included in “Other assets” in the Company's consolidated balance sheets.
The initial term of the Supply Agreement extends through July 1, 2025 (the “Initial Term”) and is automatically renewed thereafter for
additional two-year terms (each, a “Renewal Term”), subject to termination by either party upon (i) two years written notice prior to
the expiration of the Initial Term or (ii) one year written notice prior to the expiration of any Renewal Term. Under the Supply
Agreement, the Company has the right, but not the obligation, to purchase certain assets and assume certain liabilities from Fresenius.
The Company made payments to Fresenius of $29.5 million, $21.3 million and $18.1 million relating to the manufacturing of the
Company’s products during the years ended December 31, 2019, 2018 and 2017, respectively. The following table summarizes the
amounts of the Company’s payables to and receivables from Fresenius at December 31, 2019 and December 31, 2018 (in thousands).
Payables to Fresenius (1)......................................................................................................... $
Receivables from Fresenius (2) ...............................................................................................
8,470 $
1,796
(1)
(2)
Included in “Accounts Payable” and “Accrued Liabilities” in the Company's consolidated balance sheets.
Included in “Prepaid and other current assets” in the Company's consolidated balance sheets.
December 31, 2019
December 31, 2018
7,812
1,777
Agreement with BARDA
In June 2016, the Company entered into an agreement with BARDA to support the Company’s development and implementation of
pathogen reduction technology for platelet, plasma, and red blood cells.
The five-year agreement with BARDA and its subsequent modifications include a base period (the “Base Period”) and options (each,
an “Option Period”) with committed funding of up to $103.2 million for clinical development of the INTERCEPT Blood System for
red blood cells (the “red blood cell system”), and the potential for the exercise by BARDA of subsequent Option Periods that, if
exercised by BARDA and completed, would bring the total funding opportunity to $201.2 million over the five-year contract period. If
exercised by BARDA, subsequent Option Periods would fund activities related to broader implementation of the platelet and plasma
system or the red blood cell system in areas of Zika virus risk, clinical and regulatory development programs in support of the
potential licensure of the red blood cell system in the U.S., and development, manufacturing and scale-up activities for the red blood
cell system. The Company is responsible for co-investment of $5.0 million and would be responsible for an additional $9.6 million, if
certain Option Periods are exercised. Through December 31, 2019, the Company has incurred approximately $0.8 million related to
the co-investment. BARDA will make periodic assessments of the Company’s progress and the continuation of the agreement is based
on the Company’s success in completing the required tasks under the Base Period and each exercised Option Period. BARDA has
rights under certain contract clauses to terminate the agreement, including the ability to terminate the agreement for convenience at
any time.
101
As of December 31, 2019 and 2018, $4.2 million and $2.3 million, respectively, of billed and unbilled amounts were included in
accounts receivable on the Company’s consolidated balance sheets related to BARDA.
Note 14. Income Taxes
U.S and foreign components of consolidated loss before income taxes for the years ended December 31, 2019, 2018 and 2017, was as
follows (in thousands):
Loss before income taxes:
U.S. ............................................................................................................... $
Foreign..........................................................................................................
Loss before income taxes.................................................................................. $
(71,946) $
965
(70,981) $
(58,048) $
713
(57,335) $
(57,925)
1,227
(56,698)
2019
2018
2017
The provision for income taxes for the years ended December 31, 2019, 2018 and 2017, was as follows (in thousands):
2019
2018
2017
Provision for income taxes:
Current:
Foreign.......................................................................................................... $
Federal ..........................................................................................................
State ..............................................................................................................
Total current............................................................................................
Deferred:
Foreign..........................................................................................................
Federal ..........................................................................................................
State ..............................................................................................................
Total deferred..........................................................................................
Provision for income taxes................................................................................. $
255 $
—
2
257
—
4
2
6
263 $
225 $
—
—
225
—
3
1
4
229 $
181
—
—
181
—
3,659
47
3,706
3,887
The difference between the provision for income taxes and the amount computed by applying the federal statutory income tax rate to
loss before taxes for the years ended December 31, 2019, 2018 and 2017, was as follows (in thousands):
Federal statutory tax........................................................................................... $
Tax Act revaluation of deferred taxes................................................................
Tax Act deemed income inclusion.....................................................................
Federal research credits......................................................................................
State research credits..........................................................................................
Expiration of federal carryovers ........................................................................
Expiration of state carryovers ............................................................................
Change in valuation allowance ..........................................................................
Compensation related items...............................................................................
State taxes ..........................................................................................................
Other ..................................................................................................................
Provision for income taxes................................................................................. $
2019
2018
2017
(14,906) $
—
—
(1,857)
(821)
5,472
—
13,059
158
(1,111)
269
263 $
(12,040) $
—
—
(1,390)
(655)
4,154
1,344
9,913
(361)
(1,141)
405
229 $
(19,277)
81,923
1,083
(1,000)
(628)
—
1,475
(59,462)
1,382
(803)
(806)
3,887
The Tax Cuts and Jobs Act (the “Tax Act”) resulted in a significant revaluation in the Company’s deferred tax balances as of the date
of December 22, 2017, enactment due to the change in the statutory rate. In addition, all of the previously unremitted earnings of
Cerus Europe B.V. were deemed to be distributed as of December 31, 2017, which resulted in a one-time deemed income inclusion.
102
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes at the enacted rates. The significant components of the
Company’s deferred tax assets and liabilities at December 31, 2019 and 2018, were as follows (in thousands):
December 31,
2019
2018
Deferred tax assets:
Net operating loss carryforwards ...................................................................................... $
Research and development credit carryforwards ..............................................................
Capitalized research and development..............................................................................
Compensation related items ..............................................................................................
Operating leases ................................................................................................................
Other..................................................................................................................................
Total deferred tax assets....................................................................................................
Valuation allowance ...............................................................................................................
Net deferred tax assets....................................................................................................... $
135,536 $
28,291
12,832
9,843
4,374
4,547
195,423
(192,304)
3,119 $
125,016
26,705
15,293
8,310
—
4,013
179,337
(179,245)
92
Deferred tax liabilities:
Right-of-use assets............................................................................................................ $
Amortization of goodwill ..................................................................................................
Total deferred tax liabilities......................................................................................... $
3,017 $
143
3,160 $
—
127
127
The valuation allowance increased by $13.1 million for the year ended December 31, 2019, compared to the increase of $9.9 million
and decrease of $59.5 million for the years ended December 31, 2018 and 2017, respectively. The Company believes that, based on a
number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets
such that a valuation allowance has been recorded. These factors include the Company’s history of net losses since its inception, the
need for regulatory approval of the Company’s products prior to commercialization and expected near-term future losses. The
Company expects to maintain a valuation allowance until circumstances change.
For the year ended December 31, 2019, the Company reported pretax net losses on its consolidated statement of operations and
calculated taxable losses for both federal and state taxes. The difference between reported net loss and taxable loss are due to
differences between book accounting and the respective tax laws.
The Company's tax losses and credits are subject to varying carryforward periods. The gross amounts and dates of expiration of the
significant carryforwards are as follows:
Total
Expires
2020-2022
Expires
2023-2029
Expires
2030-2039
$
Federal losses carryovers ........
California loss carryovers .......
Federal research credits...........
California research credits ......
Federal foreign tax credits.......
616,915 $
67,781
19,397
11,259
610
64,730 $
—
6,928
—
—
186,421 $
14,732
4,875
—
610
No
Expiration
126,033
—
—
11,259
—
239,731 $
53,049
7,594
—
—
The Company’s ability to utilize net operating loss and research and development credit carryforwards is limited by (a) its ability to
generate future taxable income, (b) varying apportionment and allocation rules including new provisions as part of the Tax Act, and
(c) limitations pursuant to the ownership change rules in accordance with Section 382 of the Internal Revenue Code of 1986 and with
Section 383 of the Internal Revenue Code of 1986, as well as similar state provisions.
The Company’s unrecognized tax benefits relate to federal and California research tax credits. These tax credits have not been utilized
on any tax return and currently have no impact on the Company’s tax expense due to the Company’s operating losses and the related
valuation allowances.
103
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands):
Unrecognized tax benefits at beginning of period.................................................................. $
Decreases related to expired carryforwards ......................................................................
Increases related to current year tax positions ..................................................................
Unrecognized tax benefits at end of period ............................................................................ $
11,063 $
(729)
508
10,842 $
11,062
(401)
402
11,063
The Company will recognize 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 consolidated statements of operations, nor has it accrued for or made
payments for interest and penalties.
December 31,
2019
December 31,
2018
Note 15. Segment, Customer and Geographic Information
The Company continues to operate in only one segment, blood safety. The Company’s chief executive officer is the chief operating
decision maker who evaluates performance based on the net revenues and operating loss of the blood safety segment. The Company
considers the sale of all of its INTERCEPT Blood System products to be similar in nature and function, and any revenue earned from
services is minimal.
The Company’s operations outside of the U.S. include a wholly-owned subsidiary headquartered in Europe. The Company’s
operations in the U.S. are responsible for the R&D and global and domestic commercialization of the INTERCEPT Blood System,
while operations in Europe are responsible for the commercialization efforts of the platelet and plasma systems in Europe, the
Commonwealth of Independent States and the Middle East. Product revenues are attributed to each region based on the location of the
customer, and in the case of non-product revenues, on the location of the collaboration partner.
The Company had the following significant customers that accounted for more than 10% of the Company’s total product revenue,
during the years ended December 31, 2019, 2018 and 2017 (in percentages):
Établissement Français du Sang.........................................................................
American Red Cross ..........................................................................................
* Represents an amount less than 10% of product revenue.
2019
27%
14%
Year Ended December 31,
2018
38%
*
2017
22%
*
Revenues by geographical location were based on the location of the customer during the years ended December 31, 2019, 2018 and
2017, and was as follows (in thousands):
Product revenue:
United States................................................................................................. $
France ...........................................................................................................
Belgium ........................................................................................................
Other countries .............................................................................................
Total product revenue .............................................................................
Government contract revenue:
United States.................................................................................................
Total government contract revenue ........................................................
Total revenue ..................................................................................... $
2019
Year Ended December 31,
2018
2017
20,611 $
20,075
7,272
26,691
74,649
19,125
19,125
93,774 $
12,563 $
23,043
6,788
18,514
60,908
15,143
15,143
76,051 $
6,316
9,692
6,263
21,297
43,568
7,758
7,758
51,326
104
Long-lived assets by geographical location at December 31, 2019 and 2018, were as follows (in thousands):
U.S. and territories ................................................................................................................. $
Europe & other .......................................................................................................................
Total long-lived assets ...................................................................................................... $
14,619 $
411
15,030 $
8,252
212
8,464
December 31,
2019
2018
Note 16. Quarterly Financial Information (Unaudited)
The following tables summarize the Company’s quarterly financial information for the years ended December 31, 2019 and 2018 (in
thousands except per share amounts):
Product revenue ............................................................................. $
Gross profit on product revenue ....................................................
Government contract revenue........................................................
Net loss ..........................................................................................
Net loss per share:
17,504 $
9,072
4,461
(18,792)
18,209 $
10,098
4,266
(17,562)
Three Months Ended
March 31,
2019
June 30,
2019
September 30,
2019
December
31,
2019
20,917
11,624
5,571
(16,923)
18,019 $
10,436
4,827
(17,967)
Basic.........................................................................................
Diluted......................................................................................
(0.14)
(0.14)
(0.13)
(0.13)
(0.13)
(0.13)
(0.12)
(0.12)
Product revenue.................................................................................. $
Gross profit on product revenue.........................................................
Government contract revenue ............................................................
Net loss...............................................................................................
Net loss per share:
Three Months Ended
March 31,
2018
June 30,
2018
September 30,
2018
December 31,
2018
13,564 $
6,234
3,455
(13,885)
15,420 $
7,700
4,047
(13,282)
15,399 $
7,257
3,928
(14,192)
16,525
8,083
3,713
(16,205)
Basic..............................................................................................
Diluted ..........................................................................................
(0.11)
(0.11)
(0.10)
(0.10)
(0.11)
(0.11)
(0.12)
(0.12)
Note 17. Subsequent Event
In January 2020, the Company issued and sold 16,866,667 shares of the Company’s common stock, par value $0.001 per share, at
$3.75 per share in an underwritten public offering. The total proceeds to the Company from this offering were $63.3 million, before
deducting estimated offering expenses payable by the Company.
105
Pursuant to the requirement of Section 13 or 15(d) 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, in the City of Concord, State of California, on the 21st day of
February, 2020.
SIGNATURES
CERUS CORPORATION
By:
/s/ WILLIAM M. GREENMAN
William M. Greenman
President and Chief Executive Officer
Each person whose signature appears below constitutes and appoints William M. Greenman and Kevin D. Green, his true and lawful
attorney-in-fact and agent, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any or all amendments to the Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the
capacities and on the dates indicated.
Signature
/s WILLIAM M. GREENMAN
William M. Greenman
/s/ KEVIN D. GREEN
Kevin D. Green
/s/ DANIEL N. SWISHER, JR.
Daniel N. Swisher, Jr.
/s/ TIMOTHY B. ANDERSON
Timothy B. Anderson
/s/ ERIC H. BJERKHOLT
Eric H. Bjerkholt
/s/ TIMOTHY L. MOORE
Timothy L. Moore
/s/ JAMI NACHTSHEIM
Jami Nachtsheim
/s/ GAIL SCHULZE
Gail Schulze
/s/ FRANK WITNEY, PH.D.
Frank Witney, Ph.D.
Title
Date
President, Chief Executive
Officer and Director
(Principal Executive Officer)
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
February 21, 2020
February 21, 2020
Chairman of the Board of Directors
February 21, 2020
Director
Director
Director
Director
Director
Director
February 21, 2020
February 21, 2020
February 21, 2020
February 21, 2020
February 21, 2020
February 21, 2020
106
CERTIFICATION
Exhibit 31.1
I, William M. Greenman, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Cerus Corporation;
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;
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;
The registrant’s other certifying officer 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.
b.
c.
d.
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;
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;
Evaluated the effectiveness of the registrant’s 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
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a.
b.
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 registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 21, 2020
/s/ WILLIAM M. GREENMAN
William M. Greenman
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION
Exhibit 31.2
I, Kevin D. Green, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Cerus Corporation;
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;
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;
The registrant’s other certifying officer 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.
b.
c.
d.
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;
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;
Evaluated the effectiveness of the registrant’s 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
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a.
b.
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 registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 21, 2020
/s/ KEVIN D. GREEN
Kevin D. Green
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION
Exhibit 32.1
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 Financial Officer of the Company, hereby
certify that, to the best of their knowledge:
1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2019, to which this Certification is
attached as Exhibit 32.1 (the “Annual 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 Annual 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 21st day of February, 2020.
/s/ WILLIAM M. GREENMAN
William M. Greenman
Chief Executive Officer
(Principal Executive Officer)
/s/ KEVIN D. GREEN
Kevin D. Green
Chief Financial Officer
(Principal Financial Officer)
This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange
Commission and is not to be 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-K), irrespective
of any general incorporation language contained in such filing.
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Executive Management
William “Obi” Greenman
President and Chief Executive Officer
Chrystal Menard
Chief Legal Officer and General Counsel
Richard J. Benjamin, MBChB,
PhD, FRCPath
Chief Medical Officer
Laurence M. Corash, M.D.
Chief Scientific Officer
Kevin D. Green
Vice President, Finance and
Chief Financial Officer
Vivek K. Jayaraman
Chief Operations Officer
Suzanne Margerum
Vice President, Device Development
and Manufacturing
Board of Directors
Daniel N. Swisher, Jr. (Chair)
President and Chief Operations Officer,
Jazz Pharmaceuticals, plc.
Timothy B. Anderson
Former Senior Vice President
Baxter International, Inc.
Carol Moore
Senior Vice President, Regulatory
Affairs and Quality
Nina Mufti
Vice President, Development and
Red Blood Cell Program Leader
Lori L. Roll
Vice President, Administration
and Corporate Secretary
Yasmin Singh
Vice President, Development and Platelets,
Plasma and Therapeutics Program Leader
(middle row) N. Mufti , R. Benjamin, Y. Singh, S. Margerum
(bottom row) K. Green , L. Roll, V. Jayaraman, C. Menard (Not pictured)
Eric H. Bjerkholt
Chief Financial Officer
Aimmune Therapeutics, Inc.
William “Obi” Greenman
President and
Chief Executive Officer
Cerus Corporation
Timothy L. Moore
President and
Chief Technical Officer
PACT Pharma
Jami Dover Nachtsheim
Former Vice President of Sales and
Marketing Group
Intel Corporation
Gail Schulze
Former Chairman
Zosano Pharma, Inc.
Frank R. Witney, Ph.D.
Former President and
Chief Executive Officer
Affymetrix, Inc.
Corporate Information
Corporate Headquarters
1220 Concord Avenue, Suite 600
Concord, California 94520
Telephone: (925) 288-6000
Fax: (925) 288-6001
www.cerus.com
European Headquarters
Stationsstraat 79-D
3811 MH Amersfoort
Netherlands
Telephone: 31 33 496 0600
Fax: 31 33 496 0606
Annual Report on Form 10-K
A copy of the Company’s Annual
Report on Form 10-K as filed
with the Securities and Exchange
Commission is available without
charge on request to:
Investor Relations Department
Cerus Corporation
1220 Concord Avenue, Suite 600
Concord, California 94520
Telephone: (925) 288-6137
Email: ir@cerus.com
Forward-Looking Statement
Corporate Counsel
Cooley LLP
San Francisco, California
Patent Counsel
Morrison & Foerster LLP
Palo Alto, California
Auditors
Ernst & Young LLP
Redwood City, California
Stock Information
The Company’s common stock
traded on the Nasdaq Stock
Market under the symbol: CERS
Registrar and Transfer Agent
Equiniti Trust Company
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120
Telephone: (800) 401-1957
Fax: (651) 450-4033
Annual Meeting of Stockholders
Wednesday, June 3, 2020
9:00 a.m. Pacific Time
Online at:
www.virtualshareholdermeeting.com/CERS2020
The Annual Meeting webcast will begin promptly
at 9:00 a.m., Pacific Time. We encourage you to
access the webcast prior to the start time.
This Annual Report contains forward-looking statements concerning our products and prospects, including statements concerning the timing for a potential submission to the
FDA for a pathogen-reduced, extended-storage cryoprecipitate product and the potential approval and future launch thereof, in the U.S., and the potential market acceptance
such a product will have in the U.S.; our continued commercial momentum into 2020 and beyond; the sufficiency of our cash and additional capital to continue our growth
initiatives; and the use of pathogen reduction to reduce the risk of transfusion transmitted infections from plasma. Actual results could differ materially from these forward-
looking statements as a result of certain factors, including, without limitation: the uncertain and time-consuming development and regulatory process, including: that the
FDA may not approve a pathogen-reduced cryoprecipitate product or an extended storage indication; unanticipated difficulties meeting the PMA supplement requirements
for a pathogen-reduced, extended-storage cryoprecipitate product; that the FDA could require additional clinical data to support potential approval of a pathogen-reduced,
extended-storage cryoprecipitate product and that if additional clinical development is required, it will require funding that Cerus does not currently have; risks associated
with commercialization and market acceptance of, and customer demand for, the INTERCEPT treated cryoprecipitate; that customer demand for INTERCEPT may not
continue to increase in 2020 and beyond; the uncertainty of Cerus’ future capital requirements and its future revenues and other financial performance; and the risks that the
INTERCEPT Blood System may not inactivate all bacteria, viruses and parasites, including SARS-CoV-2 in convalescent plasma, as well as other risks detailed in Cerus’ most
recent filings with the Securities and Exchange Commission, including Cerus’ Annual Report on Form10-K for the fiscal year ended December 31, 2019, filed with the SEC on
February 21, 2020. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report. Cerus does not
undertake any obligation to update any forward-looking statements as a result of new information, future events, changed assumptions or otherwise.
Cerus, INTERCEPT and INTERCEPT Blood System are trademarks of Cerus.
Our Mission
Cerus will establish INTERCEPT as the standard of care for
transfused blood components globally and enable our customers
to do everything in their power to deliver safe and effective blood
products to patients.
At Cerus, we are proud of our unwavering focus on achieving our
mission, as reflected in our core values:
• The patient is our ultimate concern. We intend to make
INTERCEPT the standard of care for blood safety globally.
• We will be a dependable partner for all blood services to allow
them to achieve their important mission, concentrating on
ensuring the quality, supply, and operational efficiency
of our products. No other company will know blood center
operations better, nor provide better service.
• We operate as one team and resolve to attract and retain
the best people in the business. We operate in multiple
cultures and geographies and work in a coordinated, mutually
supportive fashion.
•
Integrity, perseverance, scientific rigor, and urgency are core to
who we are.
www.cerus.com
1220 Concord Avenue, Suite 600
Concord, CA 94520, USA
ph +1 (925) 288-6000
fx +1 (925) 288-6001