CERUS CORP - Quarter Report: 2011 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2011

or

For the transition period from:             to             

Commission File Number 0-21937

CERUS CORPORATION

(Exact name of registrant as specified in its charter)

2550 Stanwell Drive

Concord, California 94520

(Address of principal executive offices, including Zip Code)

(925) 288-6000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

As of October 26, 2011, there were 48.1 million shares of the registrant’s common stock outstanding.

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CERUS CORPORATION

QUARTERLY REPORT ON FORM 10-Q

THREE AND NINE MONTHS ENDED SEPTEMBER  30, 2011

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PART I: FINANCIAL INFORMATION

CERUS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

See notes to condensed consolidated financial statements.

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CERUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED

(in thousands, except per share data)

See notes to condensed consolidated financial statements.

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CERUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

(in thousands)

See notes to condensed consolidated financial statements.

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CERUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include those of Cerus Corporation and its subsidiary, Cerus Europe B.V. (collectively referred to hereinafter as Cerus or the Company) after elimination of all intercompany accounts and transactions. These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission, (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring entries, considered necessary for a fair presentation have been made for the three and nine months ended September 30, 2011. As previously reported in the Company’s 2010 Annual Report on Form 10-K in “Note 18. Quarterly Financial Information” in the Notes to Consolidated Financial Statements, adjustments relating to the acquisition of certain assets from BioOne Corporation (“BioOne”) were made to previously reported financial statements for the three and nine months ended September 30, 2010. These adjustments increased long-term assets and reduced operating expenses by $0.2 million for the three months ended September 30, 2010, and reduced long-term assets and increased operating expenses by $0.2 million for the nine months ended September 30, 2010. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011, or for any future periods.

These condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2010, which were included in the Company’s 2010 Annual Report on Form 10-K, filed with the SEC on March 16, 2011. The accompanying balance sheet as of December 31, 2010 has been derived from the Company’s audited financial statements as of that date.

Use of Estimates

The preparation of financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from those estimates under different assumptions or conditions.

Revenue

The Company recognizes revenue in accordance with the ASC Topic 605-25, “Revenue Recognition – Arrangements with Multiple Deliverables,” as applicable. Revenue is recognized when (i) persuasive evidence of an agreement with the funding party exists; (ii) services have been rendered or product has been delivered; (iii) pricing is fixed or determinable; and (iv) collection is probable. The Company’s main sources of revenues through September 30, 2011 were product revenue from sales of the INTERCEPT Blood System for platelets and plasma (“platelets and plasma systems”) and United States government grants and awards.

Revenue related to product sales is generally recognized when the Company fulfills its obligations for each element of an agreement. For all INTERCEPT Blood System products, the Company uses a binding purchase order and signed sales contract as evidence of written agreement. The Company sells its platelets and plasma systems directly to blood banks, hospitals, universities, government agencies, as well as to distributors in certain regions. Generally, the Company’s contracts with its customers do not provide for open return rights, except within a reasonable time after receipt of goods in the case of defective or non-conforming product. Deliverables and the units of accounting vary according to the provisions of each purchase order or sales contract. For revenue arrangements with multiple elements, the Company evaluates whether the delivered elements have stand-alone value to the customer. Effective January 1, 2011, the Company adopted the revised guidance in Accounting Standard Update (“ASU”) No. 2009-13, which was issued by the Financial Accounting Standards Board (“FASB,”) in October 2009 related to revenue recognition in accordance with the Accounting Standards Codification (“ASC”) Topic 605-25, “Revenue Recognition—Arrangements with Multiple Deliverables,” on a prospective basis for applicable transactions originating or materially modified after December 31, 2010. Under the revised guidance, companies must assess whether or not revenue arrangements with multiple deliverables exist under the revised guidance, how the deliverables should be separated and how the consideration should be allocated to the elements. Prior to adoption of ASU No. 2009-13, consideration received was allocated to elements that were identified as discrete units of accounting based on the relative fair value method. Beginning January 1, 2011, upon the adoption of ASU No. 2009-13, consideration received is allocated to elements that are identified as discrete units of accounting based on the best estimated selling price. The Company has determined that vendor specific objective evidence is not discernable due to the

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Company’s limited history of selling its products and variability in its pricing. Since the Company’s products are novel and unique and are not sold by others, third-party evidence of selling price is unavailable. The adoption of the revised guidance did not have a material impact on the Company’s condensed consolidated results of operations for the three and nine months ended September 30, 2011 nor is it currently anticipated to have a material impact on future periods.

At September 30, 2011 and December 31, 2010, the Company had $0.1 million and $0.2 million, respectively, of short-term deferred revenue on its condensed consolidated balance sheets related to future performance obligations. Freight costs charged to customers are recorded as a component of revenue under ASC Topic 605, “Accounting for Shipping and Handling Fees and Costs.” Value-added-taxes (“VAT”) that the Company invoices to its customers and remits to governments, are recorded on a net basis, which excludes such VAT from product revenue.

Revenue related to the cost reimbursement provisions under development contracts is recognized as the costs on the projects are incurred. The Company receives certain United States government grants and contracts that support research in defined research projects. These grants generally provide for reimbursement of approved costs incurred as defined in the various grants.

Research and Development Expenses

The Company receives certain United States government grants that support the Company’s efforts in defined research projects. These grants generally provide for reimbursement of approved costs incurred as defined in the various grants. Revenue associated with these grants is recognized as costs under each grant are incurred. In addition, accordance with ASC Topic 730, “Accounting for Research and Development Expenses,” research and development expenses are charged to expense when incurred. Research and development expenses include salaries and related expenses for scientific personnel, payments to consultants, supplies and chemicals used in in-house laboratories, costs of research and development facilities, depreciation of equipment and external contract research expenses, including clinical trials, preclinical safety studies, other laboratory studies, process development and product manufacturing for research use.

The Company’s use of estimates in recording accrued liabilities for research and development activities (described previously in this Note under the heading “Use of Estimates”) affects the amounts of research and development expenses recorded and revenue recorded from development funding and government grants and collaborative agreements. Actual results may differ from those estimates under different assumptions or conditions.

Cash, Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be classified as cash equivalents. Investments with original maturities of greater than three months but less than one year from the date of purchase are classified as short-term investments. These investments primarily consist of marketable debt securities, which include money market instruments and United States government agency securities, and are classified as available-for-sale.

In accordance with ASC Topic 320, “Accounting for Certain Investments in Debt and Equity Securities,” the Company has classified all debt securities as available-for-sale at the time of purchase and reevaluates such designation as of each balance sheet date. Available-for-sale securities are carried at estimated fair value based on quoted market prices. Unrealized gains and losses derived by changes in the estimated fair value of available-for-sale securities are recorded in “Accumulated other comprehensive income” on the Company’s condensed consolidated balance sheets. Realized gains and losses from the sale or maturity of available-for-sale investments are recorded in “Other expense, net” on the Company’s condensed consolidated statements of operations. The cost of securities sold is based on the specific identification method. The Company reports the amortization of any premium and accretion of any discount resulting from the purchase of debt securities as a component of interest expense.

The Company also reviews all of its marketable securities on a regular basis to evaluate whether any security has experienced an other-than-temporary decline in fair value. Other-than-temporary declines in market value are recorded in “Other expense, net” on the Company’s condensed consolidated statements of operations.

As of September 30, 2011, the Company also maintained a certificate of deposit for approximately $0.2 million with a domestic bank. The Company holds this certificate of deposit for any potential decommissioning resulting from the Company’s possession of radioactive material. The certificate of deposit is held to satisfy the financial surety requirements of the California Department of Health Services and is recorded as restricted cash on its condensed consolidated balance sheets at September 30, 2011 and December 31, 2010.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments and accounts receivable.

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Substantially all of the Company’s cash, cash equivalents and short-term investments are maintained pursuant to the Company’s investment policy at a major financial institution of high credit standing. The Company monitors the financial credit worthiness of the issuers of its investments and limits the concentration in individual securities and type of investments that exist within its investment portfolio. Generally, all of the Company’s remaining investments carry high credit quality ratings, which is in accordance with its investment policy. At September 30, 2011, the Company does not believe there is significant financial risk from non-performance by the issuers of the Company’s cash equivalents and short-term investments.

Concentrations of credit risk with respect to trade receivables exist. However, in connection with the Company’s revolving line of credit, as discussed in Note 9 in the Notes to condensed consolidated financial statements, the Company purchased a credit insurance policy that mitigates some of its credit risk, as the policy will pay either the Company or its lender on eligible claims filed on its outstanding receivables. On a regular basis, including at the time of sale, the Company performs credit evaluations of its customers. Generally, the Company does not require collateral from its customers to secure accounts receivable. To the extent that the Company determines specific invoices or customer accounts may be uncollectible, the Company reserves against the accounts receivable on its balance sheet and records a charge on its condensed consolidated statement of operations.

The Company had recorded allowances for potentially uncollectible accounts receivable of approximately $0.1 million at both September 30, 2011 and December 31, 2010. Actual collection losses may differ from management’s estimate, and such differences could have a material impact to the Company’s financial position and results of operations.

The Company had three customers each accounting for more than 10% of the Company’s outstanding trade receivables, which accounted for approximately 66% of outstanding trade receivables, at September 30, 2011. The Company had four customers each accounting for more than 10% of the Company’s outstanding trade receivables, which accounted for approximately 63% of outstanding trade receivables at December 31, 2010. To date, the Company has not experienced collection difficulties from these customers.

Inventories

Inventory consisted of work-in-process and finished goods only. Finished goods include INTERCEPT disposable kits, UVA illumination devices (“illuminators”), and certain replacement parts for the illuminators. Platelet and plasma systems’ disposable kits generally have two-year life from the date of manufacture. Illuminators and replacement parts do not have regulated expiration dates. Work-in-process includes certain components that are manufactured over a protracted length of time, which can exceed one year, before being incorporated and assembled by Fenwal, Inc. (“Fenwal”) into the finished INTERCEPT disposable kits. The Company maintains an inventory balance based on its current sales projections, and at each reporting period, the Company evaluates whether its work-in-process inventory would be consumed for production of finished units in order to sell to existing and prospective customers within the next twelve-month period. In addition, it is not customary for the Company’s production cycle for inventory to exceed twelve months. Instead, the Company uses its best judgment to factor in lead times for the production of its finished units to meet the Company’s current demands. If actual results differ from those estimates, work-in-process inventory could potentially accumulate for periods exceeding one year. At September 30, 2011 and December 31, 2010, the Company classified its work-in-process inventory as a current asset on its condensed consolidated balance sheet based on its evaluation that the work-in-process inventory would be consumed for production and subsequently sold within each respective subsequent twelve-month period.

Inventory is recorded at the lower of cost, determined on a first-in, first-out basis, or market value. The Company frequently reviews the composition of inventory to identify obsolete, slow-moving or otherwise unsalable items. To the extent unsalable items are observed and there is no alternative use, the Company writes-down its inventory to net realizable value in the period that it is first recognized. The write-down of its inventory to net realizable value establishes a new cost basis and will be maintained even if certain circumstances suggest that the inventory is recoverable in subsequent periods. Costs associated with the write-down of inventory are recorded in “Cost of product revenue” on the Company’s condensed consolidated statements of operations. At September 30, 2011 and December 31, 2010, the Company had $0.2 million and $0.4 million, respectively, reserved for potential obsolete or expiring product.

Property and Equipment, net

Property and equipment is comprised of furniture, equipment, information technology hardware and software and is recorded at cost. At the time the property and equipment is ready for its intended use, it is depreciated on a straight-line basis over the estimated useful lives of the assets (generally three to five years). Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful lives of the improvements.

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Goodwill and Intangible Assets, net

Goodwill and intangible assets, net is derived at the time of a business acquisition, in which the Company assigns the total consideration transferred to the acquired assets based on each asset’s fair value and any residual amount becomes goodwill, an indefinite life intangible asset. Intangible assets, net, which include the INTERCEPT Asia license, are subject to periodic amortization over the estimated useful life of ten years. The amortization of the Company’s intangible assets, net, is recorded in “Amortization of intangible assets” on the Company’s condensed consolidated statements of operations.

Goodwill is not amortized but instead is subject to an impairment test performed on an annual basis, or more frequently if events or changes in circumstances indicate that they may be impaired. The Company evaluates goodwill on an annual basis on August 31 of each fiscal year. The test for goodwill impairment is a two-step process. The first step compares the fair value of each reporting unit with its respective carrying amount, including goodwill. The Company has determined that it operates in one reporting unit and estimates the fair value of its one reporting unit using the enterprise approach under which it considers the quoted market capitalization of the Company as reported by NASDAQ. The Company considers quoted market prices that are available in active markets to be the best evidence of fair value. The Company also considers other factors, which include future forecasted results, the economic environment and overall market conditions. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and, therefore, the second step of the impairment test is unnecessary. The second step, which is used to measure the amount of impairment loss, compares the implied fair value of each reporting unit’s goodwill with the respective carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

See Note 6 in the Notes to condensed consolidated financial statements for further information regarding the Company’s impairment analysis and the valuation of goodwill and intangible assets, net.

Long-lived Assets

The Company evaluates its long-lived assets for impairment by continually monitoring events and changes in circumstances that could indicate carrying amounts of its long-lived assets may not be recoverable. When such events or changes in circumstances occur, the Company assesses recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the expected undiscounted future cash flows are less than the carrying amount of these assets, the Company then measures the amount of the impairment loss based on the excess of the carrying amount over the fair value of the assets. The Company did not recognize impairment charges related to its long-lived assets during the three and nine months ended September 30, 2011 and 2010.

Foreign Currency Remeasurement

The functional currency of the Company’s foreign subsidiary is the United States Dollar. Monetary assets and liabilities denominated in foreign currencies are remeasured in United States Dollars using the exchange rates at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are remeasured in United States Dollars using historical exchange rates. Revenues and expenses are remeasured using average exchange rates prevailing during the period. Remeasurements are recorded in the Company’s condensed consolidated statements of operations. The Company recorded foreign currency gains (losses) of less than $(0.1) million and $0.8 million during the three months ended September 30, 2011 and 2010, respectively, and $0.4 million and $(0.2) million during the nine months ended September 30, 2011 and 2010, respectively.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation.” Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period, and is adjusted for estimated forfeitures. To the extent that stock options contain performance criteria for vesting, stock-based compensation is recognized once the performance criteria are probable of being achieved.

For stock-based awards issued to non-employees, the Company follows ASC Topic 505-50, “Equity Based Payment to Non-Employees” and considers the measurement date at which the fair value of the stock-based award is measured to be the earlier of 1) the date at which a commitment for performance by the grantee to earn the equity instrument is reached or 2) the date at which the grantee performance is complete. The Company recognizes stock-based compensation expense for the fair value of the vested portion of the non-employee stock-based awards in its condensed consolidated statements of operations.

See Note 11 in the Notes to condensed consolidated financial statements for further information regarding the Company’s stock-based compensation assumptions and expenses.

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Warrant Liability

In August 2009 and November 2010, the Company issued warrants to purchase an aggregate of 2.4 million and 3.7 million shares of common stock, respectively. The material terms of the warrants were identical under each issuance except for the exercise price, date issued and expiration date. The Company classified the warrants as a liability on its condensed consolidated balance sheets as the warrants contain certain material terms which require the Company (or its successor) to purchase the warrants for cash in an amount equal to the value of the unexercised portion of the warrants (as determined in accordance with the Black-Scholes option pricing model) in connection with certain change of control transactions. In addition, the Company may also be required to pay cash to a warrant holder under certain circumstances if the Company is unable to timely deliver the shares acquired upon warrant exercise to such holder.

The fair value of these outstanding warrants is calculated using the binomial-lattice option-pricing model and is adjusted accordingly at each reporting period. The binomial-lattice option-pricing model requires that the Company uses significant assumptions and judgment to determine appropriate inputs to the model. Some of the assumptions that the Company relies on include the probability of a change of control occurring, the volatility of the Company’s stock over the life of the warrant and assumptions and inputs used to value the warrants under the Black-Scholes model should a change of control occur.

Gains and losses from warrant revaluation are recorded in “Gain (Loss) from revaluation of warrant liability” on the condensed consolidated statements of operations. During the three and nine months ended September 30, 2011, the Company recorded non-cash gains of $5.4 million and $3.8 million, respectively, associated with changes in the fair value of the warrants from December 31, 2010. During the three and nine months ended September 30, 2010, the Company recorded non-cash charges of $0.7 million and $2.3 million, respectively, associated with changes in the fair value of the warrants from December 31, 2009. Upon the exercise or modification to remove the provisions which require the warrants to be treated as a liability, the fair value of the warrants will be reclassified from a liability to stockholders’ equity on the Company’s condensed consolidated balance sheets and no further adjustment to the fair value would be made in subsequent periods.

See Note 10 in the Notes to condensed consolidated financial statements for further information regarding the Company’s valuation of warrant liability.

Other Comprehensive Income

The components of comprehensive income (loss) include net income (loss) and other comprehensive income. The Company’s only component of other comprehensive income for the three and nine months ended September 30, 2011 and 2010 consisted of unrealized gains from the Company’s available-for-sales short-term investments. Other comprehensive income is reported as a separate component of stockholders’ equity.

Income Taxes

The Company accounts for income taxes using an asset and liability approach in accordance with ASC Topic 740 “Accounting for Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. ASC Topic 740 requires derecognition of tax positions that do not have a greater than 50% likelihood of being recognized upon review by a taxing authority having full knowledge of all relevant information. Use of a valuation allowance as described in ASC Topic 740 is not an appropriate substitute for the derecognition of a tax position. The Company did not have any recorded liabilities for unrecognized tax benefits at September 30, 2011 or December 31, 2010. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its income tax expense. To date, the Company has not recognized any interest and penalties in its condensed consolidated statements of operations, nor has its accrued for or made payments for interest and penalties. The Company continues to carry a full valuation allowance on all of its deferred tax assets. Although the Company believes it more likely than not that a taxing authority would agree with its current tax positions, there can be no assurance that the tax positions the Company has taken will be substantiated by a taxing authority if reviewed. The Company’s tax years 2006 through 2010 remain subject to examination by the taxing jurisdictions.

Net Income (Loss) Per Share

Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted income per share would assume conversion of all potentially dilutive securities, such as stock options, convertible preferred stock, ESPP, warrants and restricted stock units. If the Company recorded a net loss, diluted loss per share uses the same weighted average number of common shares outstanding for the period as calculated for the basic loss per share as the inclusion of any commons stock equivalents would be anti-dilutive.

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The following table sets forth the reconciliation of the numerator and denominator used in the computation of basic and diluted net income (loss) per common share for the three and nine months ended September 30, 2011 and 2010 (in thousands, except per share amounts):

The table below presents stock options, convertible preferred stock, ESPP, warrants and restricted stock units that are excluded from the diluted net income (loss) per common share due to their anti-dilutive effect for the three and nine months ended September 30, 2011 and 2010 (shares in thousands):

Guarantee and Indemnification Arrangements

The Company recognizes the fair value for guarantee and indemnification arrangements issued or modified by the Company after December 31, 2002. In addition, the Company monitors the conditions that are subject to the guarantees and indemnifications, in order to identify if a loss has occurred. If the Company determines it is probable that a loss has occurred, then any such estimable loss would be recognized under those guarantees and indemnifications. Some of the agreements that the Company is a party to, contain provisions that indemnify the counter party from damages and costs resulting from claims that the Company’s technology infringes the intellectual property rights of a third party or claims that the sale or use of the Company’s products have caused personal injury or other damage or loss. The Company has not received any such requests for indemnification under these provisions and has not been required to make material payments pursuant to these provisions.

The Company generally provides for a one-year warranty on certain of its INTERCEPT blood-safety products covering defects in materials and workmanship. The Company accrues costs associated with warranty obligations when claims become known and are estimable. There have been very few warranty costs incurred through September 30, 2011, and the company is unaware of any future warranty claims. Accordingly, at September 30, 2011 and December 31, 2010, the Company did not accrue for any potential future warranty costs.

Fair Value of Financial Instruments

The Company applies the provisions of fair value relating to its financial assets and liabilities. The carrying amounts of accounts receivables, accounts payable, and other accrued liabilities approximate their fair value due to the relative short-term maturities. Based on the borrowing rates currently available to the Company for loans with similar terms, the Company believes the fair value of long-term debt approximates their carrying amounts. The Company measures and records certain financial assets and liabilities at fair value on a recurring basis, including its available-for-sale securities and warrant liability. The Company classifies instruments within Level 1 if quote prices are available in active markets, which include its money market funds as the maturity of money market funds are relatively short and the carrying amount is a reasonable estimate of fair value. The Company classifies instruments in Level 2 if the instruments are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. These instruments include the Company’s available-for-sale securities related to United States government agencies and corporate debt securities. The available-for-sale securities are held by a custodian who obtains investment prices from a third party pricing provider that uses standard inputs to models which vary by asset class. The Company classifies instruments in Level 3 if one or more significant inputs or significant value drivers are unobservable, which include its warrant liability.

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See Note 3 in the Notes to condensed consolidated financial statements for further information regarding the Company’s valuation on financial instruments.

New Accounting Pronouncements

In May 2011, the FASB issued updated fair value measurement guidance under ASU No. 2011-14 “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” surrounding changes in the valuation premise of highest and best use of an asset, the application of premiums and discounts, and enhanced disclosure requirements. Under ASU No. 2011-14, the measurement of fair value of financial instruments will primarily be measured at the level of the unit of account whereas it was historically able to utilize the valuation premise of highest and best use of an asset, which can be applied primarily to measuring the fair value of nonfinancial assets only going forward. In addition, the application of blockage factors and other premiums and discounts in a fair value measurement will be prohibited in the valuation of all fair value levels of the hierarchy. The new disclosure requirements include, but are not limited to, further qualitative and quantitative discussions regarding level 3 fair value measurements, specifically significant unobservable inputs used, description of the valuation processes and sensitivity analysis, the disclosure of any transfers and the reasons thereof between levels 1 and 2, and the determination of assets and liabilities that are not recorded at fair value to be categorized under the fair value hierarchy. The updated fair value measurement guidance is effective for interim and annual periods beginning after December 15, 2011, which will begin for the Company on January 1, 2012. The Company does not anticipate that the additional disclosure requirements will have a material impact on the condensed consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05 “Presentation of Comprehensive Income,” which eliminates the presentation of other comprehensive income from the consolidated statements of stockholders’ equity. Instead, companies would have the option to display net income and other comprehensive income in two separate, but consecutive statements or combine net income and other comprehensive income in one continuous statement, which would be referred to the consolidated statements of comprehensive income. The new presentation requirements under this guidance are effective for interim and annual periods beginning after December 15, 2011, which will begin for the Company on January 1, 2012, and retrospective application is required for all periods presented. The Company does not anticipate that the additional disclosure requirements will have a material impact on the condensed consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08 “Testing Goodwill for Impairment,” which allows a company to test goodwill for impairment by first assessing the qualitative factors, which has also been updated under this guidance, to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount. If a company determines that it is more likely than not that the fair value of a reporting unit is less than the carrying amount, a company must then proceed with performing the quantitative two-step process to test goodwill for impairment; otherwise, goodwill is not considered impaired and no further testing is warranted. Under ASU No. 2011-08, the qualitative assessment is optional, such that a company has the choice to perform the goodwill impairment test under the original quantitative two-step approach only. The optional qualitative procedure for testing goodwill impairment under this guidance is effective for interim and annual periods beginning after December 15, 2011, which will begin for the Company on January 1, 2012; however, early adoption is permitted. The Company does not anticipate that the update to this accounting standard will have a material impact on the condensed consolidated financial statements.

Note 2. Acquisition

On August 24, 2010, the Company acquired certain assets of BioOne, a privately held Japanese company established to develop technologies to improve the safety of blood products in Asia. The assets included the commercialization licenses that the Company had granted to BioOne for both the platelet and plasma systems, illuminators held as saleable inventory and demonstration illuminators. No liabilities were assumed.

As consideration for the acquired BioOne assets, the Company relinquished all shares of BioOne that had been held by the Company and issued 1,172,357 shares of the Company’s common stock to BioOne, of which 937,886 shares were issued at the close of the acquisition on August 24, 2010 and the remaining 234,471 shares were issued six months from the close of the acquisition date (February 25, 2011). The fair value of the Company’s common stock issued to BioOne on both dates was measured based on the closing price of the Company’s common stock on August 24, 2010, the date of acquisition, and was recorded as part of the total consideration.

The total value of the consideration provided was $3.7 million, of which approximately $3.4 million related to the fair value of the 1,172,357 shares of the Company’s common stock issued to BioOne and approximately $0.3 million related to the fair value of the Company’s non-controlling equity interest in BioOne relinquished as a result of the acquisition. The Company recognized a gain of $0.3 million, which represented the difference between the assumed fair value of the pre-acquisition non-controlling equity interest of BioOne and its carrying value. The Company carried its 13% investment in BioOne at zero as it had previously fully impaired its investment in BioOne. The assumed fair value of the pre-acquisition non-controlling equity interest was calculated by applying the Company’s 13% ownership investment in BioOne to the estimated fair value of the acquired assets (excluding goodwill) of $2.4 million as noted in the table below.

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The Company also incurred acquisition related costs of $0.5 million, which were recorded as a component in “Acquisition related costs and impairment of long-term investment in related parties, net” on the consolidated statements of operations during the year ended December 31, 2010.

The BioOne acquisition was accounted for as an acquisition of a business in accordance with ASC 805, “Business Combinations.” The Company allocated the acquired tangible and intangible assets based on their estimated fair values as of the acquisition date. The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill. The goodwill recognized is not expected to be deductible for income tax purposes. The factors that contributed to the recognition of goodwill included securing buyer-specific synergies to increase revenue and profits through the commercialization of the INTERCEPT Blood System worldwide. By acquiring these commercialization rights in certain Asian countries, the Company was able to complete the global commercialization rights for its platelets and plasma systems.

The following table summarizes the final allocation of fair value of assets acquired at the acquisition date (in thousands):

The commercialization rights in Asia represent the reacquisition of contractual rights originally granted to BioOne to market the Company’s products in certain countries in Asia. The contractual term of this original agreement was perpetual and the Company estimated the fair value of these acquired rights based on future expected cash flows to be generated over the expected life of the underlying technology. As a result, these intangible assets are subject to periodic amortization over the estimated useful life of ten years. The estimated fair value of inventory illuminators and demonstration illuminators was based on the expected sales price of the inventory, less reasonable profit margins.

The Company’s operating results included the impact of the BioOne acquisition beginning from the acquisition date. The pro forma disclosures for historical periods have not been presented as the impact of the BioOne acquisition was not significant to the results of operations of the Company since BioOne did not have any significant revenues or expenses due to their limited operating activities as a result of a deteriorating financial situation.

Note 3. Fair Value on Financial Instruments

The fair values of certain of the Company’s financial assets and liabilities were determined using the following inputs at September 30, 2011 (in thousands):

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The fair values of certain of the Company’s financial assets were determined using the following inputs at December 31, 2010 (in thousands):

A reconciliation of the beginning and ending balances for warrant liabilities using significant unobservable inputs (Level 3) from December 31, 2010 to September 30, 2011 was as follows (in thousands):

The Company did not have any transfers amongst fair value measurement levels during the nine months ended September 30, 2011.

Note 4. Cash, Cash Equivalents and Short-Term Investments

The following is a summary of cash, cash equivalents and short-term investments at September 30, 2011 (in thousands):

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The following is a summary of cash, cash equivalents and short-term investments at December 31, 2010 (in thousands):

Cash equivalents and short-term investments consisted of the following by original contractual maturity (in thousands):

The maturities of certain short-term investments were estimated primarily based upon assumed prepayment features and credit enhancement characteristics.

Gross realized gains from the sale or maturity of available-for-sale investments were minimal during the nine months ended September 30, 2011. The Company did not record any gains from the sale or maturity of available-for-sale investments during the three months ended September 30, 2011 and during the three and nine months ended September 30, 2010. The Company did not record losses on investments experiencing an other-than-temporary decline in fair value during the three and nine months ended September 30, 2011 and 2010, nor did it record any gross realized losses from the sale or maturity of available-for-sale investments during the three and nine months ended September 30, 2011. However, the Company recorded minimal gross realized losses from the sale or maturity of available-for-sale investments during the three and nine months ended September 30, 2010.

Note 5. Inventories

Inventories consisted of the following (in thousands):

Note 6. Goodwill and Intangible Assets, net

Goodwill

During the three and nine months ended September 30, 2011, the Company did not dispose of or recognize additional goodwill. On August 31, 2011, the Company performed its annual review of goodwill. As described in Note 1 above, the Company applied the enterprise approach by reviewing the quoted market capitalization of the Company as reported by NASDAQ to calculate the fair value. In addition, the Company considered its future forecasted results, the economic environment and overall market conditions. As a result of the Company’s assessment that its fair value of the reporting unit exceeded its carrying amount, the Company determined that goodwill was not impaired during the three or nine months ended September 30, 2011. Therefore, the carrying amount of goodwill was $1.3 million, which resulted from the August 2010 acquisition of certain assets from BioOne, at both September 30, 2011 and December 31, 2010.

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Intangible Assets, net

The following is a summary of intangible assets, net at September 30, 2011 (in thousands):

The following is a summary of intangible assets, net at December 31, 2010 (in thousands):

The Company recognized $0.05 million and $0.2 million in amortization expense related to intangible assets for the three and nine months ended September 30, 2011, respectively. During the three and nine months ended September 30, 2011, there were no impairment charges recognized and the Company did not renew or extend the term of the acquired intangible assets.

The expected annual amortization expense of the intangible assets, net at September 30, 2011 are $0.05 million for the remaining three months of 2011, $0.2 million each subsequent year thereafter through December 31, 2019 and $0.1 million in 2020.

Note 7. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

Note 8. Commitments and Contingencies

Operating Leases

The Company generally leases its office facilities and certain equipment under non-cancelable operating leases with initial terms in excess of one year that require the Company to pay operating costs, property taxes, insurance and maintenance. These facility leases generally contain renewal options and provisions adjusting the lease payments if those renewal options are exercised. The Company’s facility leases qualify as operating leases under ASC Topic 840, “Leases” and as such, are not included on its condensed consolidated balance sheets.

Royalties

The Company is obligated to pay royalties on certain INTERCEPT Blood System product sales based on a percentage of net sales generated. The royalty rates vary by product, with a rate of 10% of net sales for the platelet system, 3% of net sales for the plasma system, 5% of net sales for the red blood cells, or the red blood cell system, and 6.5% of net sales for UVA illuminators.

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Purchase Commitments

The Company is party to agreements with certain providers for certain components of INTERCEPT Blood System which the Company purchases from third party manufacturers and supplies to Fenwal at no cost for use in manufacturing finished disposable kits. Certain of these agreements require minimum purchase commitments from the Company.

Note 9. Long-term Note Payable

Long-term note payable at September 30, 2011 consisted of the following (in thousands):

Long-term note payable at December 31, 2010 consisted of the following (in thousands):

Principal and interest payments on the long-term note payable at September 30, 2011 are expected to be as follows for each of the following five years (in thousands):

Loan and Security Agreement

In September 2011, the Company entered into a loan and security agreement (the “Credit Agreement”) with Comerica Bank (“Comerica”). The Credit Agreement provides for a growth capital loan of up to $8.0 million (“Growth Capital Loan”) and a formula based revolving line of credit (“RLOC”) of up to $4.0 million plus any unused amounts from the Growth Capital Loan. Under the Credit Agreement, the Company is limited to an aggregate borrowing of up to $10.0 million at any time. The Company pledged all current and future assets, excluding its intellectual property and 35% of the Company’s investment in its subsidiary, Cerus Europe B.V., as security for borrowings under the Credit Agreement.

Growth Capital Loan

Concurrent with the execution of the Credit Agreement, in September 2011, the Company borrowed $5.0 million of the Growth Capital Loan (“Growth Capital Loan A”), substantially all of which was used to repay the Company’s prior debt with Oxford Finance Corporation (“Oxford”), as discussed in further detail below, with the remainder used for general corporate purposes. Growth Capital Loan A, which matures in 48 months, bears a fixed interest rate of 6.37%, with interest–only payments due for the first twelve months, followed by equal principal and interest payments for the remaining 36 months.

The Company may draw up to an additional $3.0 million of the Growth Capital Loan (“Growth Capital Loan B”) between December 31, 2011 and June 30, 2012. Growth Capital Loan B will bear a fixed interest rate based on the higher of (i) 6.25% or (ii) 6.00% plus the three month LIBOR rate at the date of draw, with interest–only payments due for the first six months followed by equal principal and interest payments for the remaining 36 months.

In September 2011, the Company incurred a commitment fee of $40,000 and loan fees of $50,000, which were recorded as a discount to its Growth Capital Loan A and are being amortized as a component of interest expense using the effective interest method over the term of the Growth Capital Loan A (discount was based on an implied interest rate of 7.07%). The Company will also be required to make a final payment fee of 1% of the amounts drawn under

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Growth Capital Loan A and Growth Capital Loan B due on the earlier of (i) prepayment of the Growth Capital Loan or (ii) the maturity of the Growth Capital Loan. The final payment fee will be accreted to interest expense using the effective interest method over the life of the Growth Capital Loan A and B upon draw.

Revolving Line of Credit

The Credit Agreement also provides for a RLOC of up to $4.0 million plus any unused amounts from Growth Capital Loan B (“RLOC Loan Amount”). The amount available under the RLOC, which is available to the Company until September 30, 2013, is limited to the lesser of (i) 80% of eligible trade receivables or (ii) the RLOC Loan Amount. The RLOC will bear a floating rate based on the lender’s prime rate plus 1.50%, with interest–only payments due each month. The Company will be required to repay the principal drawn from the RLOC at the end of the RLOC term. In September 2011, the Company incurred a commitment fee of $20,000, and will pay the same commitment fee at each annual anniversary of the RLOC. As of September 30, 2011, the Company had not drawn down any amounts under the RLOC.

Compliance with Covenants

The Company is required to maintain compliance with certain customary and routine financial covenants under the Credit Agreement. Throughout the term of the Credit Agreement, the Company is also obligated to meet certain conditions which include maintaining a minimum cash balance of $2.5 million and achieving minimum revenue levels, which will be measured monthly based on a six-month trailing basis and must be at least 75% of the pre-established future projected revenues for the six-month period. Non-compliance with the covenants could result in the principal of the note becoming due and payable. As of September 30, 2011, the Company was in compliance with the financial covenants as set forth in the Credit Agreement.

Growth Capital Facility Agreement

In March 2010, the Company entered into a growth capital facility agreement with Oxford and immediately borrowed and issued a senior secured long-term note payable for $5.0 million. The note carried a fixed interest rate of 12.04%, with interest–only payments due for the first nine months and then equal principal and interest payments for an additional 30 months. In connection with the issuance of the note, the Company paid an upfront facility fee of $0.1 million and incurred closing costs of $0.1 million, which was recorded as a discount to the note payable and was amortized as a component of interest expense using the effective interest method over the term of the note (discount was based on an implied interest rate of 13.84%). In addition, the Company agreed to pay a $0.4 million closing fee upon maturity of the note, which was being accreted to interest expense using the effective interest method over the life of the note. In September 2011, the Company repaid the outstanding balance of the long-term note payable owed to Oxford using the proceeds received from the Credit Agreement as discussed in further detail above. The Company also accelerated and expensed the remaining closing cost and fees of $0.2 million to interest expense during the three and nine months ended September 30, 2011.

Note 10. Stockholders’ Equity

Series B Preferred Stock

Fenwal holds 3,327 shares of the Company’s Series B preferred stock. The holder of Series B preferred stock has no voting rights, except with respect to the authorization of any class or series of stock having preference or priority over the Series B preferred stock as to voting, liquidation or conversion or with respect to the determination of fair market value of non-publicly traded shares received by the holder of Series B preferred stock in the event of a liquidation, or except as required by Delaware law. At any time, the holder may convert each share of Series B preferred stock into 100 shares of the Company’s common stock. If all shares of Series B preferred stock were converted to common stock, 332,700 shares of common stock would be issued, which represents approximately 1% of the outstanding common stock of the Company at September 30, 2011. The Company has the right to redeem the Series B preferred stock prior to conversion for a payment of $9.5 million.

Common Stock and Associated Warrant Liability

In August 2009, the Company received net proceeds of approximately $12.1 million, after deducting placement agent’s fees and stock issuance costs of approximately $1.1 million, from a registered direct offering of 6.0 million units. Each unit sold consisted of one share of common stock and a warrant to purchase 4/10 of a share of common stock. Each unit was sold for $2.20, resulting in the issuance of 6.0 million shares of common stock and warrants to purchase 2.4 million shares of common stock (“2009 Warrants”), exercisable at an exercise price of $2.90 per share. The warrants issued in August 2009 (“2009 Warrants”) are exercisable for a period of five years from the issue date. The fair value on the date of issuance of the 2009 Warrants was determined to be $2.8 million using the binomial-lattice option valuation model and applying the following assumptions: (i) a risk-free rate of 2.48%, (ii) an expected term of 5.0 years, (iii) no dividend yield and (iv) a volatility of 77%. At September 30, 2011, the fair value of the 2009 Warrants was determined to be approximately $1.7 million using the binomial-lattice option valuation model and applying the following assumptions: (i) a risk-free rate of 0.42%, (ii) an expected term of 2.90 years, (iii) no dividend yield and (iv) a volatility of 65%.

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In November 2010, the Company received net proceeds of approximately $19.7 million, after deducting underwriting discounts and commissions and stock issuance costs of approximately $1.3 million, from an underwritten public offering of 7.4 million units. Each unit sold consisted of one share of common stock and a warrant to purchase 1/2 of a share of common stock. Each unit was sold for $2.85, resulting in the issuance of 7.4 million shares of common stock and warrants to purchase 3.7 million shares of common stock, exercisable at an exercise price of $3.20 per share. The warrants issued in November 2010 (“2010 Warrants”) became exercisable on May 15, 2011 and are exercisable for a period of five years from the issue date. The fair value on the date of issuance of the 2010 Warrants was determined to be $5.8 million using the binomial-lattice option valuation model and applying the following assumptions: (i) a risk-free rate of 1.23%, (ii) an expected term of 5.0 years, (iii) no dividend yield and (iv) a volatility of 85%. At September 30, 2011, the fair value of the 2010 Warrants was determined to be approximately $2.9 million using the binomial-lattice option valuation model and applying the following assumptions: (i) a risk-free rate of 0.69%, (ii) an expected term of 4.12 years, (iii) no dividend yield and (iv) a volatility of 63%.

The fair value of the 2009 Warrants and 2010 Warrants was recorded on the consolidated condensed balance sheets as a liability pursuant to “Accounting for Derivative Instruments and Hedging Activities” and “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” Topics of ASC and will be adjusted to fair value at each financial reporting date thereafter until the earlier of exercise or expiration, at which time, these warrants would be reclassified into stockholders’ equity. The Company classified the 2009 Warrants and 2010 Warrants as a liability as these warrants contain certain provisions that, under certain circumstances, which may be out of the Company’s control, could require the Company to pay cash to settle the exercise of the warrants or may require the Company to redeem the warrants.

These offerings were made pursuant to the Company’s shelf registration statement on Form S-3.

For the three months ended September 30, 2011 and 2010, due to the changes in fair value of the warrants, the Company recorded gains of $5.4 million and losses of $0.7 million, respectively, on its condensed consolidated statement of operations within non-operating income (expense), net. For the nine months ended September 30, 2011 and 2010, due to the changes in fair value of the warrants, the Company recorded gains of $3.8 million and losses of $2.3 million, respectively, on its condensed consolidated statement of operations within non-operating income (expense), net. At September 30, 2011, no warrants had been exercised.

At-the-Market Agreement

In June 2011, the Company entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with McNicoll, Lewis & Vlak LLC (“MLV”), which allows the Company to issue and sell shares of its common stock having an aggregate offering price of up to $20.0 million through MLV. In conjunction with the Sales Agreement, MLV will act as the Company’s sales agent and will receive compensation based on an aggregate of 3% of the gross proceeds on the sale price per share of its common stock. Any sales made pursuant to the Sale Agreement are deemed an “at-the-market” offering and would be made pursuant to the effectiveness of the Company’s shelf registration statements on Form S-3, initially filed with the SEC in October 2008 and August 2009. The Company did not place any common stock under the Sales Agreement during the three and nine months ended September 30, 2011.

Stockholder Rights Plan

In October 2009, the Company’s Board of Directors adopted an amendment to its 1999 stockholder rights plan, commonly referred to as a “poison pill,” to reduce the exercise price, extend the expiration date and revise certain definitions under the plan. The stockholder rights plan is intended to deter hostile or coercive attempts to acquire the Company. The stockholder rights plan enables stockholders to acquire shares of the Company’s common stock, or the common stock of an acquirer, at a substantial discount to the public market price should any person or group acquire more than 15% of the Company’s common stock without the approval of the Board of Directors under certain circumstances. The Company has designated 250,000 shares of Series C Junior Participating preferred stock for issuance in connection with the stockholder rights plan.

Note 11. Stock-Based Compensation

The Company maintains an equity incentive plan to provide long-term incentives for employees, contractors, and members of its Board of Directors. The plan allows for the issuance of non-statutory and incentive stock options, restricted stock, restricted stock units, stock appreciation rights, other stock-related awards, and performance awards which may be settled in cash, stock, or other property. The Company also maintains an active employee stock purchase plan within the meaning of Section 423(b) of the Internal Revenue Code. Under the Purchase Plan, the Company’s Board of Directors may authorize participation by eligible employees, including officers, in periodic offerings.

The Company has granted restricted stock units to its Senior Management. Subject to each grantee’s continued employment, shares underlying the grants vest in three annual installments and are issuable at the end of the three-year vesting term.

The Company currently uses the Black-Scholes option pricing model to determine the grant-date fair value of stock options and employee stock purchase plan shares. The Black-Scholes option pricing model is affected by the Company’s stock price, as well as assumptions regarding a number of complex and subjective variables, which include the expected term of the grants, the Company’s expected stock price volatility, actual and projected employee stock option exercise behaviors, including forfeitures, the risk-free interest rate and expected dividends.

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Total stock-based compensation recognized on the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010, was as follows (in thousands):

The Company did not record any stock-based compensation associated with the stock options exercisable for 50,000 shares of Common Stock with performance based vesting during the three and nine months ended September 30, 2011 and 2010 as the performance criteria was not probable of being achieved. These performance-based stock options remain outstanding at September 30, 2011.

Activity under the Company’s equity incentive plans is set forth below (in thousands except per share amounts):

Note 12. Comprehensive Income (Loss)

Comprehensive income (loss) and its components for the three and nine months ended September 30, 2011, and 2010 were as follows (in thousands):