Attached files

file filename
EX-32.2 - EX-32.2 - GERON CORPgern-ex322_6.htm
EX-32.1 - EX-32.1 - GERON CORPgern-ex321_7.htm
EX-31.2 - EX-31.2 - GERON CORPgern-ex312_8.htm
EX-31.1 - EX-31.1 - GERON CORPgern-ex311_9.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to            .

 

Commission File Number: 0-20859

 

 

GERON CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

75-2287752

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

149 COMMONWEALTH DRIVE, SUITE 2070, MENLO PARK, CA

 

94025

(Address of principal executive offices)

 

(Zip Code)

 

(650) 473-7700

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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      No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes      No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 

 

Accelerated filer 

 

 

 

 

 

Non-accelerated filer 

(Do not check if a smaller reporting company)

Smaller reporting company 

 

 

 

 

 

Emerging growth company

 

 

 

 

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.  

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class:

 

Outstanding at October 25, 2017:

Common Stock, $0.001 par value

 

159,231,814 shares

 

 

 


GERON CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1:

 

Condensed Financial Statements (Unaudited)

 

1

 

 

Condensed Balance Sheets as of September 30, 2017 and December 31, 2016

 

1

 

 

Condensed Statements of Operations for the three and nine months ended September 30, 2017 and 2016

 

2

 

 

Condensed Statements of Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016

 

3

 

 

Condensed Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

 

4

 

 

Notes to Condensed Financial Statements

 

5

Item 2:

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

16

Item 3:

 

Quantitative and Qualitative Disclosures About Market Risk

 

24

Item 4:

 

Controls and Procedures

 

24

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1:

 

Legal Proceedings

 

24

Item 1A:

 

Risk Factors

 

25

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

56

Item 3:

 

Defaults Upon Senior Securities

 

56

Item 4:

 

Mine Safety Disclosures

 

56

Item 5:

 

Other Information

 

56

Item 6:

 

Exhibits

 

56

 

 

SIGNATURE

 

57

 

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1.

CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

GERON CORPORATION

CONDENSED BALANCE SHEETS

(IN THOUSANDS)

 

 

 

SEPTEMBER 30,

 

 

DECEMBER 31,

 

 

 

2017

 

 

2016

 

 

 

(UNAUDITED)

 

 

(NOTE 1)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,904

 

 

$

12,810

 

Restricted cash

 

 

268

 

 

 

268

 

Marketable securities

 

 

86,991

 

 

 

102,035

 

Interest and other receivables

 

 

514

 

 

 

475

 

Prepaid assets

 

 

886

 

 

 

524

 

Total current assets

 

 

98,563

 

 

 

116,112

 

Noncurrent marketable securities

 

 

15,560

 

 

 

13,954

 

Property and equipment, net

 

 

121

 

 

 

183

 

 

 

$

114,244

 

 

$

130,249

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

261

 

 

$

225

 

Accrued compensation and benefits

 

 

2,651

 

 

 

2,843

 

Accrued collaboration charges

 

 

1,946

 

 

 

3,367

 

Accrued liabilities

 

 

1,112

 

 

 

1,434

 

Total current liabilities

 

 

5,970

 

 

 

7,869

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock

 

 

159

 

 

 

159

 

Additional paid-in capital

 

 

1,086,578

 

 

 

1,080,198

 

Accumulated deficit

 

 

(978,411

)

 

 

(957,924

)

Accumulated other comprehensive loss

 

 

(52

)

 

 

(53

)

Total stockholders' equity

 

 

108,274

 

 

 

122,380

 

 

 

$

114,244

 

 

$

130,249

 

 

See accompanying notes.

1


 

GERON CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

 

 

 

THREE MONTHS ENDED

 

 

NINE MONTHS ENDED

 

 

 

SEPTEMBER 30,

 

 

SEPTEMBER 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License fees and royalties

 

$

163

 

 

$

5,108

 

 

$

874

 

 

$

6,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,637

 

 

 

4,319

 

 

 

8,510

 

 

 

13,927

 

General and administrative

 

 

4,770

 

 

 

4,666

 

 

 

13,833

 

 

 

14,006

 

Total operating expenses

 

 

7,407

 

 

 

8,985

 

 

 

22,343

 

 

 

27,933

 

Loss from operations

 

 

(7,244

)

 

 

(3,877

)

 

 

(21,469

)

 

 

(21,865

)

Interest and other income

 

 

363

 

 

 

322

 

 

 

1,041

 

 

 

871

 

Interest and other expense

 

 

(18

)

 

 

(21

)

 

 

(59

)

 

 

(61

)

Net loss

 

$

(6,899

)

 

$

(3,576

)

 

$

(20,487

)

 

$

(21,055

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.04

)

 

$

(0.02

)

 

$

(0.13

)

 

$

(0.13

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing basic and diluted net loss per share

 

 

159,216,642

 

 

 

159,140,254

 

 

 

159,186,853

 

 

 

159,011,741

 

 

See accompanying notes.

2


 

GERON CORPORATION

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(IN THOUSANDS)

(UNAUDITED)

 

 

 

THREE MONTHS ENDED

 

 

NINE MONTHS ENDED

 

 

 

SEPTEMBER 30,

 

 

SEPTEMBER 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

 

$

(6,899

)

 

$

(3,576

)

 

$

(20,487

)

 

$

(21,055

)

Net unrealized gain (loss) on marketable securities

 

 

27

 

 

 

(65

)

 

 

1

 

 

 

238

 

Comprehensive loss

 

$

(6,872

)

 

$

(3,641

)

 

$

(20,486

)

 

$

(20,817

)

 

See accompanying notes.

3


 

GERON CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

CHANGE IN CASH AND CASH EQUIVALENTS

(IN THOUSANDS)

(UNAUDITED)

 

 

 

NINE MONTHS ENDED

 

 

 

SEPTEMBER 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(20,487

)

 

$

(21,055

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

57

 

 

 

63

 

Loss (gain) on retirement/sales of property and equipment

 

 

5

 

 

 

(16

)

Accretion and amortization on investments, net

 

 

213

 

 

 

507

 

Stock-based compensation for services by non-employees

 

 

159

 

 

 

123

 

Stock-based compensation for employees and directors

 

 

6,152

 

 

 

6,263

 

Amortization related to 401(k) contributions

 

 

32

 

 

 

60

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Other current assets

 

 

(401

)

 

 

(4,397

)

Other current liabilities

 

 

(1,899

)

 

 

685

 

Net cash used in operating activities

 

 

(16,169

)

 

 

(17,767

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Restricted cash transfer

 

 

-

 

 

 

(1

)

Purchases of property and equipment

 

 

-

 

 

 

(26

)

Proceeds from sales of property and equipment

 

 

-

 

 

 

16

 

Purchases of marketable securities

 

 

(81,260

)

 

 

(105,698

)

Proceeds from maturities of marketable securities

 

 

94,486

 

 

 

106,954

 

Net cash provided by investing activities

 

 

13,226

 

 

 

1,245

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuances of common stock

 

 

37

 

 

 

1,157

 

Net cash provided by financing activities

 

 

37

 

 

 

1,157

 

Net decrease in cash and cash equivalents

 

 

(2,906

)

 

 

(15,365

)

Cash and cash equivalents at the beginning of the period

 

 

12,810

 

 

 

21,248

 

Cash and cash equivalents at the end of the period

 

$

9,904

 

 

$

5,883

 

 

See accompanying notes.

 

 

4


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The terms “Geron”, the “Company”, “we” and “us” as used in this report refer to Geron Corporation. The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or any other period. These financial statements and notes should be read in conjunction with the financial statements for each of the three years ended December 31, 2016, included in the Company’s Annual Report on Form 10-K. The accompanying condensed balance sheet as of December 31, 2016 has been derived from audited financial statements at that date.

Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the periods presented, without consideration for potential common shares. Diluted net income per share would be calculated by adjusting the weighted-average number of shares of common stock outstanding for the dilutive effect of potential common shares outstanding for the periods presented, as determined using the treasury-stock method. Potential dilutive securities primarily consist of outstanding stock options, restricted stock awards and warrants to purchase our common stock. Diluted net loss per share excludes potential common shares outstanding for all periods presented as their effect would be anti-dilutive. Accordingly, basic and diluted net loss per share is the same for all periods presented in the accompanying condensed statements of operations.

Since we incurred a net loss for the three and nine months ended September 30, 2017 and 2016, the diluted net loss per share calculation excludes 2,569,221 and 2,935,462 potential common shares for the three months ended September 30, 2017 and 2016, respectively, and 2,609,727 and 3,337,103 potential common shares for the nine months ended September 30, 2017 and 2016, respectively, related to outstanding stock options and restricted stock awards (as determined using the treasury-stock method at the estimated average market value) as their effect would have been anti-dilutive. In addition, 14,897,936 and 11,536,380 potentially dilutive securities for the three months ended September 30, 2017 and 2016, respectively, and 14,354,172 and 11,298,948 potentially dilutive securities for the nine months ended September 30, 2017 and 2016, respectively, were excluded from the treasury-stock method and calculation of diluted net loss per share as their effect would have been anti-dilutive.

Use of Estimates

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to accrued liabilities, revenue recognition, fair value of marketable securities, income taxes, and stock-based compensation. Management bases its estimates on historical experience and on various other market specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Fair Value of Financial Instruments

Cash Equivalents and Marketable Securities

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. We are subject to credit risk related to our cash equivalents and marketable securities. We place our cash and cash equivalents in money market funds and cash operating accounts.

5


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(UNAUDITED)

 

We classify our marketable securities as available-for-sale. We record available-for-sale securities at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses are included in interest and other income and are derived using the specific identification method for determining the cost of securities sold and have been insignificant to date. Dividend and interest income are recognized when earned and included in interest and other income in our condensed statements of operations. We recognize a charge when the declines in the fair values below the amortized cost basis of our available-for-sale securities are judged to be other-than-temporary. We consider various factors in determining whether to recognize an other-than-temporary charge, including whether we intend to sell the security or whether it is more likely than not that we would be required to sell the security before recovery of the amortized cost basis. Declines in market value associated with credit losses judged as other-than-temporary result in a charge to interest and other income. Other-than-temporary charges not related to credit losses are included in accumulated other comprehensive income (loss) in stockholders’ equity. We have not recorded any other-than-temporary impairment charges on our available-for-sale securities for the three and nine months ended September 30, 2017 and 2016. See Note 2 on Fair Value Measurements.

Cost Method Investments

We use the cost method of accounting for non-marketable equity securities where our ownership represents less than 20% of such entity, and we cannot exert significant influence over its operations. These securities are carried at cost and adjusted for impairments.

Revenue Recognition

We recognize revenue for each unit of accounting when all of the following criteria have been met: (a) persuasive evidence of an arrangement exists, (b) delivery has occurred or services have been rendered, (c) the seller’s price to the buyer is fixed or determinable, and (d) collectability is reasonably assured. Amounts received prior to satisfying these revenue recognition criteria are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current deferred revenue. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as noncurrent deferred revenue.

License and/or Collaboration Agreements

In addition to the exclusive collaboration and license agreement, or Collaboration Agreement, that we entered into with Janssen Biotech, Inc., or Janssen, in November 2014 (which is more fully described in Note 3 on Collaboration Agreement), we have entered into several license or collaboration agreements with various oncology, diagnostics, research tools and biologics production companies. Economic terms in these agreements may include non-refundable license payments in cash or equity securities, option payments in cash or equity securities, cost reimbursements, cost-sharing arrangements, milestone payments, royalties on future sales of products, or any combination of these items. In applying the appropriate revenue recognition guidance related to these agreements, we first assess whether the arrangement contains multiple elements. In this evaluation, we consider: (i) the deliverables included in the arrangement and (ii) whether the individual deliverables represent separate units of accounting or whether they must be accounted for as a combined unit of accounting. This evaluation involves subjective determinations and requires us to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that: (i) the delivered item(s) has value to the customer on a standalone basis, and (ii) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. In assessing whether an item has standalone value, we consider factors such as the research, manufacturing and commercialization capabilities of the collaboration partner or licensee and the availability of the associated expertise in the general marketplace. In addition, we consider whether the collaboration partner or licensee can use the other deliverable(s) for their intended purpose without the receipt of the remaining element(s), whether the value of the deliverable is dependent on the undelivered item(s) and whether there are other vendors that can provide the undelivered element(s).

Arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method. We then apply the applicable revenue recognition criteria noted above to each of the separate units of accounting in determining the appropriate period and pattern of recognition. We determine how to allocate arrangement consideration to identified units of accounting based on the selling price hierarchy provided under relevant accounting guidance. The estimated fair value of deliverables under the arrangement may be derived using a best estimate of selling price if vendor-specific-objective evidence and third-party evidence are not available.

6


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(UNAUDITED)

 

Upfront non-refundable signing, license or non-exclusive option fees are recognized as revenue: (i) when rights to use the intellectual property have been delivered, if the license has standalone value from the other deliverables to be provided under the agreement, or (ii) over the term of the agreement if we have continuing performance obligations, as the arrangement would be accounted for as a single unit of accounting. When payments are received in equity securities, we do not recognize any revenue unless such securities are determined to be realizable in cash.

At the inception of an arrangement that includes milestone payments, we assess whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether: (i) the consideration is commensurate with either the performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the performance to achieve the milestone, (ii) the consideration relates solely to past performance and (iii) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. We consider various factors, such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the respective milestone and the level of effort and investment required to achieve the respective milestone, in making this assessment. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is substantive. Milestone payments for milestones that are considered substantive would be recognized as revenue in their entirety upon successful accomplishment of the milestone, assuming all other revenue recognition criteria are met. Milestone payments for milestones that are not considered substantive would be recognized as revenue over the remaining period of performance, assuming all other revenue recognition criteria are met.

Royalties are recognized as earned in accordance with contract terms when royalties from licensees can be reasonably estimated and collectability is reasonably assured. If royalties cannot be reasonably estimated or collectability of a royalty amount is not reasonably assured, royalties are recognized as revenue when the cash is received. Revenue from commercial milestone payments is accounted for as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met.

Cost-sharing expenses are recorded as earned or owed based on the performance requirements by both parties under the respective contracts. For arrangements in which we and our collaboration partner in the agreement are exposed to significant risks and rewards that depend on the commercial success of the activity, we recognize payments between the parties on a net basis and record such amounts as a reduction or addition to research and development expense. For arrangements in which we have agreed to perform certain research and development services for our collaboration partner and are not exposed to significant risks and rewards that depend on the commercial success of the activity, we recognize the respective cost reimbursements as revenue under the collaborative agreement as the related research and development services are rendered.

Restricted Cash

Restricted cash consists of funds maintained in a separate certificate of deposit account for credit card purchases.

Research and Development Expenses

Research and development expenses consist of expenses incurred in identifying, developing and testing product candidates resulting from our independent efforts as well as efforts associated with collaborations. These expenses include, but are not limited to, in-process research and development acquired in an asset acquisition and deemed to have no alternative future use, payroll and personnel expense, lab supplies, preclinical studies, clinical trials, including support for investigator-sponsored clinical trials, raw materials to manufacture clinical trial drugs, manufacturing costs for research and clinical trial materials, sponsored research at other labs, consulting, costs to maintain technology licenses, our proportionate share of research and development costs under cost-sharing arrangements with collaboration partners and research-related overhead. Research and development costs are expensed as incurred, including costs incurred under our collaboration and/or license agreements.

For the clinical development activities being conducted by Janssen under the Collaboration Agreement, we monitor patient enrollment levels and related activities to the extent possible through discussions with Janssen personnel and base our estimates on the best information available at the time. However, additional information may become available to us which would allow us to make a more accurate estimate in future periods. In this event, we may be required to record adjustments to research and development expenses in future periods when the actual level of activity becomes more certain.

7


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(UNAUDITED)

 

Depreciation and Amortization

We record property and equipment at cost and calculate depreciation using the straight-line method over the estimated useful lives of the assets, generally four years. Leasehold improvements are amortized over the shorter of the estimated useful life or remaining term of the lease.

Stock-Based Compensation

We recognize stock-based compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period. The following table summarizes the stock-based compensation expense included in operating expenses on our condensed statements of operations related to stock options, restricted stock awards and employee stock purchases for the three and nine months ended September 30, 2017 and 2016 which was allocated as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(In thousands)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Research and development

 

$

235

 

 

$

352

 

 

$

776

 

 

$

1,038

 

General and administrative

 

 

1,859

 

 

 

1,775

 

 

 

5,376

 

 

 

5,225

 

Stock-based compensation expense included in operating

   expenses

 

$

2,094

 

 

$

2,127

 

 

$

6,152

 

 

$

6,263

 

 

As stock-based compensation expense recognized in our condensed statements of operations for the three and nine months ended September 30, 2017 and 2016 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures, but at a minimum, reflects the grant-date fair value of those awards that actually vested in the period. Forfeitures have been estimated at the time of grant based on historical data and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. With the adoption of Accounting Standards Update No. 2016-09, Improvements to Employee Share Based Payment Accounting, or ASU 2016-09, in the first quarter of 2017, we elected to continue to estimate forfeitures expected to occur to determine the amount of stock-based compensation expense to be recognized in each period. In addition, the adoption of ASU 2016-09 did not impact our accounting for or presentation of excess tax benefits recognized on stock-based compensation expense on our financial statements since our net deferred tax assets are fully offset by a valuation allowance due to our history of operating losses. Presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to all periods presented.

Stock Options

We grant options with service-based vesting under our equity plans to employees, non-employee directors and consultants. The vesting period for employee options is generally four years. The fair value of options granted during the nine months ended September 30, 2017 and 2016 has been estimated at the date of grant using the Black Scholes option-pricing model with the following assumptions:

 

 

 

Nine Months Ended September 30,

 

 

2017

 

2016

Dividend yield

 

0%

 

0%

Expected volatility range

 

0.884 to 0.892

 

0.888 to 0.890

Risk-free interest rate range

 

1.98% to 1.99%

 

1.21% to 1.38%

Expected term

 

5.5 yrs

 

5.5 yrs

 

8


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(UNAUDITED)

 

Employee Stock Purchase Plan

The fair value of employees’ purchase rights during the nine months ended September 30, 2017 and 2016 has been estimated using the Black Scholes option-pricing model with the following assumptions:

 

 

 

Nine Months Ended September 30,

 

 

2017

 

2016

Dividend yield

 

0%

 

0%

Expected volatility range

 

0.577 to 0.641

 

0.641 to 0.684

Risk-free interest rate range

 

0.45% to 0.89%

 

0.28% to 0.45%

Expected term range

 

6 - 12 mos

 

6 - 12 mos

 

Dividend yield is based on historical cash dividend payments. The expected volatility is based on historical volatilities of our stock since traded options on Geron stock do not correspond to option terms and the trading volume of options is limited. The risk-free interest rate is based on the U.S. Zero Coupon Treasury Strip Yields for the expected term in effect on the date of grant for an award. The expected term of options is derived from actual historical exercise and post-vesting cancellation data and represents the period of time that options granted are expected to be outstanding. The expected term of employees’ purchase rights is equal to the purchase period.

Non-Employee Stock-Based Awards

For our non-employee stock-based awards, the measurement date on which the fair value of the stock-based award is calculated is equal to the earlier of: (i) the date at which a commitment for performance by the counterparty to earn the equity instrument is reached or (ii) the date at which the counterparty’s performance is complete. We recognize stock-based compensation expense for the fair value of the vested portion of non-employee awards in our condensed statements of operations.

Segment Information

Our executive management team represents our chief decision maker. We view our operations as a single segment, the development of therapeutic products for oncology. As a result, the financial information disclosed herein materially represents all of the financial information related to our principal operating segment.

Recent Accounting Pronouncements Not Yet Effective

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014-09, or ASU 2014-09, which creates Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, or Topic 606, and supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In summary, the core principle of Topic 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Companies are allowed to select between two transition methods: (1) a full retrospective transition method with the application of the new guidance to each prior reporting period presented, or (2) a modified retrospective transition method that recognizes the cumulative effect on prior periods at the date of adoption together with additional footnote disclosures. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In March, April, May and December 2016, the FASB issued Accounting Standards Update No. 2016-08 (Topic 606), Revenue From Contracts With Customers: Principal vs. Agent Considerations, or ASU 2016-08, Accounting Standards Update No. 2016-10 (Topic 606), Revenue From Contracts with Customers: Identifying Performance Obligations and Licensing, or ASU 2016-10, Accounting Standards Update No. 2016-12 (Topic 606), Revenue From Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, or ASU 2016-12, and Accounting Standards Update No. 2016-20 (Topic 606), Revenue from Contracts with Customers: Technical Corrections and Improvements to Topic 606, or ASU 2016-20, respectively, to provide supplemental adoption guidance and clarification to ASU 2014-09. We plan to adopt ASU 2014-09 and its related supplemental guidance on January 1, 2018 using the modified retrospective transition method.

9


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(UNAUDITED)

 

The new revenue standard is principles-based and the interpretation of those principles may vary from company to company based on their unique circumstances. It is possible that interpretations, industry practice, and guidance may evolve as companies and the accounting profession work to implement this new standard. While we are continuing to assess the differences in accounting for our existing contracts under the new guidance compared to current revenue accounting standards, we have not identified any material differences in the accounting treatment under ASU 2014-09 compared to the current accounting treatment for the Collaboration Agreement with Janssen and the license agreement with Janssen Pharmaceuticals, Inc., which are our most significant license agreements. Upon adoption of ASU 2014-09, we expect royalty revenues from product sales by licensees of our human telomerase reverse transcriptase, or hTERT, technology to be recognized earlier than under our current accounting policy for revenue recognition. Accordingly, we expect to record a one-time cumulative catch-up adjustment to reflect estimated royalty revenues on product sales earned in 2017, but received in 2018. We do not expect this adjustment to have a material impact on our financial statements and related disclosures. However, such assessments are preliminary and subject to change. As we complete our evaluation of this new standard, new information may arise that could change our current understanding of the impact to revenue and expense recognized historically. Additionally, we will continue to monitor industry activities and any additional guidance provided by regulators, standard setters, or the accounting profession and adjust our assessments and implementation plans accordingly.

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01, which requires equity investments to be measured at fair value with changes in fair value recognized in net income. However, an entity has the option to either measure equity investments without readily determinable fair values at fair value or at cost adjusted for changes in observable prices minus impairment, using a simplified impairment assessment that utilizes qualitative assessments. ASU 2016-01 requires separate presentation of financial assets and liabilities by category and form. ASU 2016-01 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. We plan to adopt ASU 2016-01 on January 1, 2018. We currently hold equity investments accounted for under the cost method and are evaluating the options for measuring such investments under ASU 2016-01, as well as the impact that the adoption of ASU 2016-01 will have on our financial statements and related disclosures.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 requires an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. Certain quantitative and qualitative disclosures about leasing arrangements also are required. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The updated guidance requires a modified retrospective adoption. We are currently evaluating the impact that the adoption of ASU 2016-02 will have on our financial statements and related disclosures and have not made any decision regarding the timing of adoption.

In June 2016, the FASB issued Accounting Standard Update No. 2016-13, Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. ASU 2016-13 amends the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the “incurred loss” model with an “expected loss” model. Accordingly, these financial assets will be presented at the net amount expected to be collected. ASU 2016-13 also requires that credit losses related to available-for-sale debt securities be recorded through an allowance for such losses rather than reducing the carrying amount under the current other-than-temporary-impairment model. ASU 2016-13 is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for interim and annual periods beginning after December 15, 2018. We are currently evaluating the impact of the adoption of ASU 2016-13 on our financial statements and related disclosures and have not made any decision regarding the timing of adoption.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, or ASU 2016-15, to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods and early adoption is permitted. ASU 2016-15 must be applied retrospectively to each period presented. We plan to adopt ASU 2016-15 on January 1, 2018. We do not expect that the adoption of ASU 2016-15 will have a material impact on our financial statements and related disclosures.

In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash, or ASU 2016-18, to address the diversity in practice in the classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period which would require any adjustments to be reflected as of the beginning of the annual period that includes that interim period. ASU 2016-18 must be applied

10


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(UNAUDITED)

 

using a retrospective transition method to each period presented. We plan to adopt ASU 2016-18 on January 1, 2018. We do not expect that the adoption of ASU 2016-18 will have a material impact on our financial statements and related disclosures.

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation — Stock Compensation: Scope of Modification Accounting, or ASU 2017-09. ASU 2017-09 clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods and early adoption is permitted. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. We plan to adopt ASU 2017-09 on January 1, 2018. We do not expect that the adoption of ASU 2017-09 will have a material impact on our financial statements and related disclosures.

With the exception of the standards discussed above, there have been no new accounting pronouncements not yet effective that have significance, or potential significance, to our financial statements.

2. FAIR VALUE MEASUREMENTS

Cash Equivalents and Marketable Securities

Cash equivalents, restricted cash and marketable securities by security type at September 30, 2017 were as follows:

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Included in cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

8,133

 

 

$

-

 

 

$

-

 

 

$

8,133

 

Restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificate of deposit

 

$

268

 

 

$

-

 

 

$

-

 

 

$

268

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprise securities (due in

   less than one year)

 

$

17,500

 

 

$

-

 

 

$

(30

)

 

$

17,470

 

Commercial paper (due in less than one year)

 

 

11,159

 

 

 

25

 

 

 

-

 

 

 

11,184

 

Corporate notes (due in less than one year)

 

 

58,353

 

 

 

3

 

 

 

(19

)

 

 

58,337

 

Corporate notes (due in one to two years)

 

 

15,591

 

 

 

-

 

 

 

(31

)

 

 

15,560

 

 

 

$

102,603

 

 

$

28

 

 

$

(80

)

 

$

102,551

 

 

11


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(UNAUDITED)

 

Cash equivalents, restricted cash and marketable securities by security type at December 31, 2016 were as follows:

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Included in cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

11,193

 

 

$

-

 

 

$

-

 

 

$

11,193

 

Restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificate of deposit

 

$

268

 

 

$

-

 

 

$

-

 

 

$

268

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprise securities (due in less

   than one year)

 

$

5,000

 

 

$

-

 

 

$

(3

)

 

$

4,997

 

Government-sponsored enterprise securities (due in one

   to two years)

 

 

12,500

 

 

 

-

 

 

 

(42

)

 

 

12,458

 

Commercial paper (due in less than one year)

 

 

31,024

 

 

 

50

 

 

 

(5

)

 

 

31,069

 

Corporate notes (due in less than one year)

 

 

66,012

 

 

 

4

 

 

 

(47

)

 

 

65,969

 

Corporate notes (due in one to two years)

 

 

1,506

 

 

 

-

 

 

 

(10

)

 

 

1,496

 

 

 

$

116,042

 

 

$

54

 

 

$

(107

)

 

$

115,989

 

 

Marketable securities with unrealized losses at September 30, 2017 and December 31, 2016 were as follows:

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

 

Estimated

 

 

Unrealized

 

 

Estimated

 

 

Unrealized

 

 

Estimated

 

 

Unrealized

 

(In thousands)

 

Fair Value

 

 

Losses

 

 

Fair Value

 

 

Losses

 

 

Fair Value

 

 

Losses

 

As of September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprise securities (due

   in less than one year)

 

$

7,495

 

 

$

(5

)

 

$

9,975

 

 

$

(25

)

 

$

17,470

 

 

$

(30

)

Corporate notes (due in less than one year)

 

 

41,301

 

 

 

(16

)

 

 

1,500

 

 

 

(3

)

 

 

42,801

 

 

 

(19

)

Corporate notes (due in one to two years)

 

 

15,560

 

 

 

(31

)

 

 

-

 

 

 

-

 

 

 

15,560

 

 

 

(31

)

 

 

$

64,356

 

 

$

(52

)

 

$

11,475

 

 

$

(28

)

 

$

75,831

 

 

$

(80

)

As of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprise securities (due

   in less than one year)

 

$

4,997

 

 

$

(3

)

 

$

-

 

 

$

-

 

 

$

4,997

 

 

$

(3

)

Government-sponsored enterprise securities (due

   in one to two years)

 

 

12,458

 

 

 

(42

)

 

 

-

 

 

 

-

 

 

 

12,458

 

 

 

(42

)

Commercial paper (due in less than one year)

 

 

8,365

 

 

 

(5

)

 

 

-

 

 

 

-

 

 

 

8,365

 

 

 

(5

)

Corporate notes (due in less than one year)

 

 

39,218

 

 

 

(37

)

 

 

6,944

 

 

 

(10

)

 

 

46,162

 

 

 

(47

)

Corporate notes (due in one to two years)

 

 

1,496

 

 

 

(10

)

 

 

-

 

 

 

-

 

 

 

1,496

 

 

 

(10

)

 

 

$

66,534

 

 

$

(97

)

 

$

6,944

 

 

$

(10

)

 

$

73,478

 

 

$

(107

)

 

The gross unrealized losses related to government-sponsored enterprise securities, commercial paper and corporate notes as of September 30, 2017 and December 31, 2016 were due to changes in interest rates. We determined that the gross unrealized losses on our marketable securities as of September 30, 2017 and December 31, 2016 were temporary in nature. We review our investments quarterly to identify and evaluate whether any investments have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which the fair value has been less than the amortized cost basis and whether we intend to sell the security or whether it is more likely than not that we would be required to sell the security before recovery of the amortized cost basis. We currently do not intend to sell these securities before recovery of their amortized cost bases.

12


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(UNAUDITED)

 

Fair Value on a Recurring Basis

We categorize financial instruments recorded at fair value on our condensed balance sheets based upon the level of judgment associated with inputs used to measure their fair value. The categories are as follows:

 

 

Level 1

Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

 

Level 2

Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

 

Level 3

Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Below is a description of the valuation methodologies used for financial instruments measured at fair value on our condensed balance sheets, including the category for such financial instruments.

Money market funds are categorized as Level 1 within the fair value hierarchy as their fair values are based on quoted prices available in active markets. U.S. government-sponsored enterprise securities, commercial paper and corporate notes are categorized as Level 2 within the fair value hierarchy as their fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

 

The following table presents information about our financial instruments that are measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 and indicates the fair value category assigned.

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

Quoted Prices in

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

Active Markets for

 

 

Significant Other

 

 

Unobservable

 

 

 

 

 

 

 

Identical Assets

 

 

Observable Inputs

 

 

Inputs

 

 

 

 

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

As of September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

8,133

 

 

$

-

 

 

$

-

 

 

$

8,133

 

Government-sponsored enterprise securities(2)

 

 

-

 

 

 

17,470

 

 

 

-

 

 

 

17,470

 

Commercial paper(2)

 

 

-

 

 

 

11,184

 

 

 

-

 

 

 

11,184

 

Corporate notes(2)(3)

 

 

-

 

 

 

73,897

 

 

 

-

 

 

 

73,897

 

Total

 

$

8,133

 

 

$

102,551

 

 

$

-

 

 

$

110,684

 

As of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

11,193

 

 

$

-

 

 

$

-

 

 

$

11,193

 

Government-sponsored enterprise securities(2)(3)

 

 

-

 

 

 

17,455

 

 

 

-

 

 

 

17,455

 

Commercial paper(2)

 

 

-

 

 

 

31,069

 

 

 

-

 

 

 

31,069

 

Corporate notes(2)(3)

 

 

-

 

 

 

67,465

 

 

 

-

 

 

 

67,465

 

Total

 

$

11,193

 

 

$

115,989

 

 

$

-

 

 

$

127,182

 

 

(1)

Included in cash and cash equivalents on our condensed balance sheets.

(2)

Included in current portion of marketable securities on our condensed balance sheets.

(3)

Included in noncurrent portion of marketable securities on our condensed balance sheets.

Cost Method Investment

In December 2007, we granted a license to our hTERT technology for use in human diagnostics to Sienna Cancer Diagnostics Limited, or Sienna, which was a privately held company in Australia. In connection with the license, we received 13,842,625 ordinary shares in Sienna which we recorded at a zero cost basis under the cost method of accounting. On August 3, 2017, Sienna became a

13


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(UNAUDITED)

 

publicly traded company on the Australian Securities Exchange Limited, or ASX, under the ticker symbol SDX. Since our shares are subject to a 24-month trading restriction from the effective date of Sienna’s listing on the ASX, we will continue to account for our investment in Sienna under the cost method of accounting until there is a readily determinable fair value for our shares, and such shares meet the definition of a marketable security.

3. COLLABORATION AGREEMENT

On November 13, 2014, we and Janssen entered into the Collaboration Agreement under which we granted to Janssen exclusive worldwide rights to develop and commercialize imetelstat for all human therapeutic uses, including hematologic myeloid malignancies. Upon the effectiveness of the Collaboration Agreement in December 2014, we received $35,000,000 from Janssen as an upfront payment.

Under the Collaboration Agreement, Janssen is wholly responsible for the development, manufacturing, seeking regulatory approval for and commercialization of, imetelstat worldwide. To that end, Janssen is currently proceeding with the development of imetelstat with two clinical trials: a Phase 2 trial in myelofibrosis, referred to as IMbark, and a Phase 2/3 trial in myelodysplastic syndromes, referred to as IMerge. Development costs for IMbark and IMerge are being shared between us and Janssen on a 50/50 basis. Additionally, under the terms of the Collaboration Agreement, we remain responsible for prosecuting, at Janssen’s direction, the patents licensed to Janssen at the time we entered into the Collaboration Agreement, with costs shared between us and Janssen on a 50/50 basis. The cost-sharing arrangement with Janssen began in January 2015. As of September 30, 2017, accrued collaboration charges of $1,946,000 on our condensed balance sheet represent the net amount owed to Janssen for our proportionate share of development costs incurred by Janssen under the Collaboration Agreement for the three months ended September 30, 2017.

Following completion of the protocol-specified primary analysis of IMbark by Janssen, if completed, we expect Janssen to notify us of their decision, or a Continuation Decision, as to whether they elect to maintain the license rights granted to them under the Collaboration Agreement and continue to advance the development of imetelstat in any indication. In the event that IMbark is terminated early, or placed on clinical hold or suspended by a regulatory authority for an extended period of time, then Janssen must instead notify us of their Continuation Decision by the date that is approximately 24 months after the initiation of IMerge.

In the event that Janssen provides an affirmative Continuation Decision, we then would have an option, or the U.S. Opt-In Rights, to share further U.S. development and promotion costs, including our share of development costs incurred to date by Janssen beyond IMbark or IMerge, in exchange for higher tiered royalty rates and higher future development and regulatory milestone payments if imetelstat is successfully developed and approved. If we exercise the U.S. Opt-In Rights, then we and Janssen would share U.S. development and promotion costs beyond IMbark and IMerge on a 20/80 basis (Geron 20%, Janssen 80%), we would receive a $65,000,000 milestone payment, or the Continuation Fee, at the time of an affirmative Continuation Decision, and would be eligible to receive additional potential payments of up to $470,000,000 for the achievement of certain development and regulatory milestones, up to $350,000,000 for the achievement of certain sales milestones, and tiered royalties ranging from a mid-teens up to low twenties percentage rate on worldwide net sales of imetelstat in any countries where regulatory exclusivity exists or there are valid claims under the patent rights exclusively licensed to Janssen. In addition, if we exercise the U.S. Opt-In Rights, we then would also have a separate option, or the U.S. Co-Promotion Option, to provide 20% of the U.S. selling effort with our sales force personnel, in lieu of funding 20% of U.S. promotion costs, upon regulatory approval and commercial launch of imetelstat in the United States. Such co-promotion would be conducted under a Janssen prepared promotion plan, and in accordance with a co-promotion agreement to be agreed by the parties at the time of our exercise of the U.S. Co-Promotion Option. We would be responsible for all costs associated with establishing and maintaining our sales force in any conduct of such co-promotion. All product sales would be booked by Janssen. If we do not exercise the U.S. Opt-In Rights, then all further development and promotion costs beyond IMbark and IMerge would be borne by Janssen, we would receive the $65,000,000 Continuation Fee at the time of an affirmative Continuation Decision plus a $70,000,000 payment, or the Full U.S. Rights Fee, for Janssen’s retention of full U.S. rights to imetelstat, and would be eligible to receive additional potential payments of up to $415,000,000 for the achievement of certain development and regulatory milestones, up to $350,000,000 for the achievement of certain sales milestones, and tiered royalties ranging from a double-digit up to mid-teens percentage rate on worldwide net sales of imetelstat in any countries where regulatory exclusivity exists or there are valid claims under the patent rights exclusively licensed to Janssen.

After an affirmative Continuation Decision by Janssen, the Collaboration Agreement would remain in effect until the expiration of the last-to-expire patent or the royalty obligations on sales of imetelstat cease, unless terminated earlier. If Janssen does not effect an affirmative Continuation Decision, then the Collaboration Agreement would terminate and all rights to the imetelstat program would revert to us. Janssen may terminate the Collaboration Agreement at any time for convenience or due to a safety-related concern. If a notice of termination from Janssen occurs, we would be entitled to certain continued operational support and cost sharing under various circumstances and all rights to the imetelstat program would revert to us.

14


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(UNAUDITED)

 

We have determined that each of the additional potential milestone payments to us under the Collaboration Agreement, including: (i) the Continuation Fee at the time of an affirmative Continuation Decision, if any, (ii) the Full U.S. Rights Fee, if we do not exercise the U.S. Opt-In Rights and (iii) payments based on the achievement of certain development, regulatory or sales milestones, represent substantive milestones. Consequently, we will recognize revenue for these payments in their entirety upon successful accomplishment of the respective milestone. Royalties on future product sales of imetelstat, if successfully commercialized under the Collaboration Agreement, will be recognized as revenue when earned.

4. COMMITMENTS AND CONTINGENCIES

Operating Lease Commitment

On September 21, 2017, we amended the lease agreement for our premises at 149 Commonwealth Drive, Menlo Park, California, to extend the lease term from February 2018 through January 2020. Operating lease obligations under the amended lease agreement for the extended lease term include aggregate future minimum payments of approximately $1,380,000.

Securities Lawsuits

We and certain of our officers were named as defendants in two purported class action securities lawsuits filed in the United States District Court for the Northern District of California, or the California District Court, as well as a third securities lawsuit, not styled as a class action, which was originally filed in the United States District Court for the Southern District of Mississippi, but subsequently transferred to the California District Court. These three cases, or the Class Action Lawsuits, which were based on the same factual background, were consolidated for all purposes.

On July 21, 2017, the California District Court entered an order and final judgment that dismissed with prejudice and released the claims asserted in the Class Action Lawsuits against all named defendants in connection with the Class Action Lawsuits, including us, and any claims that could have been asserted that arise or relate to the facts alleged in the Class Action Lawsuits, such that every member of the settlement class will be barred from asserting such claims in the future. In connection with the settlement of the Class Action Lawsuits, in April 2017, we paid $250,000 and our insurance providers paid $6,000,000 to a settlement escrow account to be paid to members of the settlement class, less payment of attorneys’ fees and costs to plaintiff’s counsel. The settlement does not constitute any admission of fault or wrongdoing by us or any of the individual defendants.

We do not expect to make any additional payments for and do not expect, and are not aware of, any additional claims arising from or related to the facts alleged in the Class Action Lawsuits and asserted by stockholders who have opted out of the settlement class in the Class Action Lawsuits. However, it is possible that additional lawsuits may be filed, or allegations may be made by stockholders, with respect to these same or other matters and also naming us and/or our officers and directors as defendants. Monitoring, initiating and defending against legal actions is time-consuming for our management, is likely to be expensive and may detract from our ability to fully focus our internal resources on our business activities. In addition, despite the availability of insurance, we may incur substantial legal fees and costs in connection with any additional litigation and such amounts could be material to our financial statements. We may expend significant resources in the settlement or defense of any additional lawsuits, and we may not prevail in such lawsuits. We have not established any reserve for any potential liability relating to any additional lawsuits.

For a more complete discussion of the Class Action Lawsuits, see the section entitled “Legal Proceedings” under Part II, Item 1 of this Form 10-Q.

 

 

 

15


 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “expects,” “plans,” “intends,” “will,” “should,” “projects,” “believes,” “predicts,” “anticipates,” “estimates,” “potential” or “continue,” or the negative thereof or other comparable terminology. These statements are within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements appear throughout the Form 10-Q and are statements regarding our intent, belief, or current expectations, primarily with respect to our business and related industry developments. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in Part II, Item 1A, entitled “Risk Factors,” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Form 10-Q.

OVERVIEW

The following discussion should be read in conjunction with the unaudited condensed financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q and with the sections entitled “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission, or SEC, on March 1, 2017.

Business Overview

We are a biopharmaceutical company that currently supports the clinical stage development of a telomerase inhibitor, imetelstat, in hematologic myeloid malignancies, by Janssen Biotech, Inc., or Janssen. Early clinical data, including molecular responses in essential thrombocythemia, or ET, and remission responses, including reversal of bone marrow fibrosis, in myelofibrosis, or MF, observed in the pilot study of imetelstat conducted at Mayo Clinic, or the Pilot Study, suggest that imetelstat may have disease-modifying activity by inhibiting the progenitor cells of the malignant clones for the underlying diseases.

In November 2014, we entered into a collaboration and license agreement, or the Collaboration Agreement, pursuant to which we granted Janssen the exclusive rights to develop and commercialize imetelstat worldwide for all indications in oncology, including hematologic myeloid malignancies, and all other human therapeutic uses. The Collaboration Agreement became effective in December 2014 and we received $35 million from Janssen as an upfront payment. Additional consideration under the Collaboration Agreement includes potential payments of up to an aggregate maximum total of $900 million for the achievement of development, regulatory and sales milestones, as well as royalties on worldwide net sales of imetelstat. Janssen may terminate the Collaboration Agreement at any time for convenience or due to a safety-related concern. Under the Collaboration Agreement, Janssen is wholly responsible for development, manufacturing, seeking regulatory approval for, and commercialization of imetelstat worldwide. All worldwide regulatory, development, manufacturing and promotional activities related to imetelstat are being managed through a joint governance structure. The joint governance structure includes a Joint Steering Committee, or JSC, with equal membership from both companies.

Under the Collaboration Agreement, Janssen has initiated two clinical trials of imetelstat: IMbark, a Phase 2 trial in MF, in which the first patient was dosed in September 2015; and IMerge, a Phase 2/3 trial in myelodysplastic syndromes, or MDS, in which the first patient was dosed in January 2016. We are contributing 50% of the development costs for these trials, which Janssen is solely conducting. For a further discussion of the Collaboration Agreement, see Note 3 on Collaboration Agreement in Notes to Condensed Financial Statements of this Form 10-Q.

IMerge is a two-part clinical trial evaluating imetelstat in transfusion dependent patients with Low or Intermediate-1 risk MDS who have relapsed after or are refractory to prior treatment with an erythropoiesis stimulating agent, or ESA. Part 1 of the trial was originally designed as a Phase 2, open-label, single-arm trial to assess the efficacy and safety of imetelstat. Efficacy assessments include hematologic improvement and reduction in transfusion requirements. Part 2 of the trial is planned as a Phase 3 double-blind, randomized, controlled trial in approximately 170 patients. The primary efficacy endpoint is the rate of red blood cell transfusion independence, or RBC-TI, lasting at least 8 weeks. Key secondary endpoints include the rates of red blood cell transfusion independence lasting at least 24 weeks and hematologic improvement.

16


 

In September 2016, an internal data review of IMerge was conducted, and the JSC determined to continue IMerge unmodified. In April 2017, a second internal data review of IMerge was completed, and the JSC determined to continue IMerge unmodified.

In Part 1 of IMerge, 32 patients were enrolled, of which a subset of 13 patients had not received prior treatment with either a hypomethylating agent, or HMA, or lenalidomide and did not have a deletion 5q, or non-del(5q), chromosomal abnormality. As of May 2017, this 13-patient subset showed an increased durability and rate of transfusion independence compared to the overall trial population (>8-week RBC-TI: 53.8% vs 34.4%). The safety profile in Part 1 was consistent with prior clinical trials of imetelstat in hematologic malignancies, and no new safety signals were identified. The most common adverse events were cytopenias, which were manageable, and included Grade 3/4 neutropenia and thrombocytopenia.

Based on these data from the 13-patient subset, the JSC decided, in July 2017, to amend Part 1 of the protocol to enroll approximately 20 additional patients who are non-del(5q) and naïve to HMA and lenalidomide treatment in order to increase the experience and confirm the benefit-risk profile of imetelstat dosed at 7.5 mg/kg every four weeks in this refined target patient population to inform a decision to potentially treat patients in this population in Part 2 of IMerge. As of October 2017, we have been informed by Janssen that sites are open for enrollment in the expanded Part 1 of IMerge.

Detailed results for Part 1 of IMerge, including key secondary endpoints of hematologic improvement and rate of RBC-TI lasting at least 24 weeks, as well as duration of response and detailed safety information have been accepted for a poster presentation at the 59th American Society of Hematology (ASH) Annual Meeting and Exposition in December 2017. The abstract for the presentation can be found at www.hematology.org.

 

In October 2017, following submission by Janssen of an application to the United States Food and Drug Administration, or FDA, requesting fast track designation for imetelstat using data from Part 1 of IMerge, the FDA notified Janssen that such fast track designation has been granted for imetelstat for the treatment of adult patients with transfusion-dependent anemia due to Low or Intermediate-1 risk MDS who are non-del(5q) and who are refractory or resistant to treatment with an ESA. Fast track designation provides opportunities for frequent interactions with FDA review staff, as well as eligibility for priority review, if relevant criteria are met, and rolling review. Fast track designation is intended to facilitate and expedite development and review of a New Drug Application to address unmet medical needs in the treatment of serious or life-threatening conditions. However, fast track designation does not accelerate conduct of clinical trials or mean that the regulatory requirements are less stringent, nor does it ensure that imetelstat will receive marketing approval or that approval will be granted within any particular timeframe. In addition, the FDA may withdraw fast track designation if it believes that the designation is no longer supported by data emerging from the imetelstat clinical development program.  

Janssen has not committed to begin Part 2 of IMerge. We believe development of imetelstat in Part 2 of IMerge by Janssen will be dependent on the results of the protocol-specified primary analysis for IMbark and/or an affirmative Continuation Decision. In addition, we expect feedback from FDA interactions, data from the expanded Part 1, continuing data from IMbark, including an internal data review expected in the first quarter of 2018, and the totality of imetelstat program information will inform Janssen’s decision whether to move forward to Part 2 of IMerge. However, we do not in any event expect Part 2 of IMerge to be initiated by Janssen if an adequate survival benefit in relapsed or refractory MF is not observed in IMbark. Further delays in decision-making related to whether to commence Part 2 of IMerge, including a decision by Janssen to delay such decision-making pending the completion of the protocol-specified primary analysis for IMbark, and/or an assessment of survival benefit in relapsed or refractory MF, would further impede the advancement of imetelstat development in lower risk MDS.

IMbark was originally designed as a Phase 2 clinical trial to evaluate two dose levels of imetelstat (either 4.7 mg/kg or 9.4 mg/kg administered every three weeks) in approximately 200 patients with Intermediate-2 or High risk MF who have relapsed after or are refractory to prior treatment with a janus kinase, or JAK, inhibitor. The co-primary efficacy endpoints for the trial are spleen response rate, defined as the proportion of patients who achieve a >35% reduction in spleen volume assessed by imaging, and symptom response rate, defined as the proportion of patients who achieve a >50% reduction in Total Symptom Score, at 24 weeks.

In September 2016, a planned internal review of data from IMbark was completed. From this first internal data review, the JSC determined that activity in the 4.7 mg/kg dosing arm did not warrant further investigation of that dose, and accordingly the 4.7 mg/kg dosing arm was closed to new patient enrollment. The JSC also determined that the 9.4 mg/kg dosing arm in IMbark warranted further investigation because encouraging trends in the efficacy data were observed, but new patient enrollment to this arm was suspended because an insufficient number of patients met the protocol defined interim efficacy criteria at 12 weeks. Following this first internal data review, the JSC determined to continue the trial to obtain additional and more mature data, and patients remaining in the treatment phase of IMbark are permitted to receive imetelstat.

17


 

In April 2017, a second internal review of IMbark was completed, which included data from the approximately 100 patients who were enrolled in the trial, with each dosing arm analyzed separately. Based on this second internal data review, the JSC determined the following:

 

The safety profile was consistent with prior clinical trials of imetelstat in hematologic malignancies, and no new safety signals were identified.

 

The data support 9.4 mg/kg as an appropriate starting dose for the relapsed or refractory MF patient population.

 

In these relapsed or refractory MF patients treated in the 9.4 mg/kg dosing arm, the spleen volume response rate observed to date was less than that reported in front-line MF patients treated in trials with other drugs. However, activity within multiple outcome measures was observed with imetelstat treatment, which suggests potential clinical benefit in this relapsed or refractory MF patient population. These outcome measures included a range of spleen volume reductions, reductions in Total Symptoms Score, and improvements in hematologic parameters, such as anemia and peripheral blood counts. In addition, the data suggest there may be a potential survival benefit associated with imetelstat treatment in these patients.

In July 2017, the JSC agreed that the timing of the protocol-specified primary analysis for IMbark will begin upon the earlier of either a pre-specified number of deaths occurring in the trial or the end of the third quarter of 2018. Following completion of this primary analysis, which would include an assessment of potential survival benefit associated with imetelstat treatment, we expect Janssen to notify us of its Continuation Decision. We believe that without an adequate survival benefit in relapsed or refractory MF, Janssen would decide to discontinue the imetelstat program and terminate the Collaboration Agreement, irrespective of any other data from IMbark or from Part 1 of IMerge. Further, the primary analysis may not occur at all if IMbark is terminated early based on preliminary or ongoing data assessments, safety concerns or for any other reason, or placed on clinical hold or suspended by a regulatory authority for an extended period of time, under which circumstances Janssen must instead notify us of its Continuation Decision by the date that is approximately 24 months after the initiation of IMerge.

Separately, a data package, including information addressing the benefit-risk profile of imetelstat in relapsed or refractory MF, was submitted by Janssen in October 2017 in response to an information request received from the FDA for additional efficacy and safety data, including deaths, justifying continued treatment of patients enrolled in IMbark, and related interactions between Janssen and the FDA are ongoing.

IMbark currently continues and patients remaining in the treatment phase may continue to receive imetelstat. All safety and efficacy assessments are being conducted as planned in the protocol, which includes an assessment of a potential survival benefit associated with imetelstat treatment. To date, median overall survival has not yet been reached in any dosing group. Enrollment of new patients to the trial remains suspended because the total number of patients enrolled to date is adequate to perform the protocol-specified primary analysis. We expect that Janssen may decide to implement a protocol amendment for IMbark for operational purposes, including updating enrollment status and possible extension of long-term treatment and follow-up of patients. We expect Janssen to perform an internal data review of IMbark in the first quarter of 2018.

In addition to an assessment of potential survival benefit in relapsed or refractory MF, we expect continuing data from IMbark, including the internal data review expected in the first quarter of 2018, the protocol-specified primary analysis for IMbark, ongoing regulatory feedback, the totality of imetelstat program information, including an assessment of the evolving treatment landscape in MF and the potential application of imetelstat in multiple hematologic malignancies, including MDS, will inform Janssen’s decision whether to continue development of imetelstat. Further delay in the timing of the Continuation Decision, or a negative Continuation Decision, which would result in termination of the Collaboration Agreement by Janssen, could increase our development costs and impair our ability to earn revenues from milestone payments or royalties under the Collaboration Agreement, any of which would severely and adversely affect our business and business prospects and the future of imetelstat.

Financial Overview

We had approximately $112.7 million in cash and investments as of September 30, 2017. To grow and diversify our business, we plan to continue our business development efforts to identify, and seek to acquire and/or in-license other oncology products, product candidates, programs or companies. Acquisition or in-licensing opportunities that we may pursue could materially affect our liquidity and capital resources and may require us to incur indebtedness or seek equity capital, or both. While we reported a small profit for the year ended December 31, 2015 due to our recognition of revenue in connection with the upfront payment from Janssen under the Collaboration Agreement, until 2015 we had never been profitable. We have incurred significant net losses since our inception in 1990, resulting principally from costs incurred in connection with our research and development activities and from general and administrative costs associated with our operations. As of September 30, 2017, we had an accumulated deficit of

18


 

$978.4 million. Since our inception, we primarily have financed our operations through the sale of equity securities, interest income on our marketable securities and payments we received under our collaborative and licensing arrangements.

Substantially all of our revenues to date have been payments under collaborative agreements, and milestones, royalties and other revenues from our licensing arrangements. We currently have no source of product revenue. The significance of future losses, future revenues and any potential future profitability will depend primarily on whether Janssen continues to develop and advance imetelstat and the clinical and commercial success of imetelstat, which would result in potential future revenues to us in the form of milestone payments and royalties under the Collaboration Agreement, and whether we in-license or acquire other oncology products, product candidates, programs or companies in order to grow and diversify our business. There can be no assurance that we will receive any milestone payments or royalties from Janssen in the future, or at all. In addition, if Janssen does not perform in the manner we expect or fulfill its responsibilities in a timely manner, or at all, including with respect to enrolling additional patients in Part 1 of IMerge and/or obtaining longer-term efficacy and safety data from IMbark to enable an assessment of potential survival benefit associated with imetelstat treatment, the clinical development, manufacturing, regulatory approval and/or commercialization of imetelstat could be delayed or terminated, and it could become necessary for us to assume responsibility for the clinical development, manufacturing, regulatory approval and/or commercialization of imetelstat at our own expense. In any event, imetelstat will require significant additional clinical testing prior to possible regulatory approval in the United States and other countries, and we do not expect imetelstat to be commercially available for many years, if at all.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2017 as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016 that materially impact our condensed financial statements.

Our condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported assets, liabilities, revenues and expenses. Note 1 of Notes to Condensed Financial Statements of this Form 10-Q describes the significant accounting policies used in the preparation of the condensed financial statements.