gern-10q_20180331.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 March 31, 2018

 

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 May 3, 2018:

Common Stock, $0.001 par value

 

173,080,653 shares

 

 

 


GERON CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2018

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1:

 

Condensed Financial Statements (Unaudited)

 

1

 

 

Condensed Balance Sheets as of March 31, 2018 and December 31, 2017

 

1

 

 

Condensed Statements of Operations for the three months ended March 31, 2018 and 2017

 

2

 

 

Condensed Statements of Comprehensive Loss for the three months ended March 31, 2018 and 2017

 

3

 

 

Condensed Statements of Cash Flows for the three months ended March 31, 2018 and 2017

 

4

 

 

Notes to Condensed Financial Statements

 

5

Item 2:

 

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

 

15

Item 3:

 

Quantitative and Qualitative Disclosures About Market Risk

 

24

Item 4:

 

Controls and Procedures

 

24

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1:

 

Legal Proceedings

 

25

Item 1A:

 

Risk Factors

 

25

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

57

Item 3:

 

Defaults Upon Senior Securities

 

57

Item 4:

 

Mine Safety Disclosures

 

57

Item 5:

 

Other Information

 

57

Item 6:

 

Exhibits

 

57

 

 

SIGNATURE

 

58

 

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1.

CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

GERON CORPORATION

CONDENSED BALANCE SHEETS

(IN THOUSANDS)

 

 

 

MARCH 31,

 

 

DECEMBER 31,

 

 

 

2018

 

 

2017

 

 

 

(UNAUDITED)

 

 

(NOTE 1)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,912

 

 

$

16,335

 

Restricted cash

 

 

268

 

 

 

268

 

Marketable securities

 

 

81,868

 

 

 

78,351

 

Interest and other receivables

 

 

569

 

 

 

436

 

Prepaid assets

 

 

512

 

 

 

580

 

Total current assets

 

 

91,129

 

 

 

95,970

 

Noncurrent marketable securities

 

 

13,184

 

 

 

14,241

 

Property and equipment, net

 

 

86

 

 

 

102

 

Other assets

 

 

1,114

 

 

 

-

 

 

 

$

105,513

 

 

$

110,313

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

502

 

 

$

503

 

Accrued compensation and benefits

 

 

1,100

 

 

 

3,385

 

Accrued collaboration charges

 

 

1,841

 

 

 

1,702

 

Other accrued liabilities

 

 

942

 

 

 

926

 

Total current liabilities

 

 

4,385

 

 

 

6,516

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock

 

 

161

 

 

 

160

 

Additional paid-in capital

 

 

1,092,931

 

 

 

1,089,684

 

Accumulated deficit

 

 

(991,633

)

 

 

(985,840

)

Accumulated other comprehensive loss

 

 

(331

)

 

 

(207

)

Total stockholders' equity

 

 

101,128

 

 

 

103,797

 

 

 

$

105,513

 

 

$

110,313

 

 

See accompanying notes.

1


 

GERON CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

 

 

 

THREE MONTHS ENDED

 

 

 

MARCH 31,

 

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

License fees and royalties

 

$

318

 

 

$

537

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

2,440

 

 

 

3,374

 

General and administrative

 

 

5,315

 

 

 

4,657

 

Total operating expenses

 

 

7,755

 

 

 

8,031

 

Loss from operations

 

 

(7,437

)

 

 

(7,494

)

Interest and other income

 

 

394

 

 

 

332

 

Change in fair value of equity investment

 

 

(125

)

 

 

-

 

Interest and other expense

 

 

(18

)

 

 

(21

)

Net loss

 

$

(7,186

)

 

$

(7,183

)

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.04

)

 

$

(0.05

)

 

 

 

 

 

 

 

 

 

Shares used in computing basic and diluted net loss per share

 

 

160,525,947

 

 

 

159,161,550

 

 

See accompanying notes.

2


 

GERON CORPORATION

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(IN THOUSANDS)

(UNAUDITED)

 

 

 

THREE MONTHS ENDED

 

 

 

MARCH 31,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(7,186

)

 

$

(7,183

)

Net unrealized loss on marketable securities

 

 

(124

)

 

 

(18

)

Comprehensive loss

 

$

(7,310

)

 

$

(7,201

)

 

See accompanying notes.

3


 

GERON CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

 

 

THREE MONTHS ENDED

 

 

 

MARCH 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,186

)

 

$

(7,183

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

16

 

 

 

20

 

Loss on retirement of property and equipment

 

 

-

 

 

 

5

 

Accretion and amortization on investments, net

 

 

24

 

 

 

55

 

Change in fair value of equity investment

 

 

125

 

 

 

-

 

Stock-based compensation for services by non-employees

 

 

71

 

 

 

57

 

Stock-based compensation for employees and directors

 

 

1,614

 

 

 

1,983

 

Amortization related to 401(k) contributions

 

 

10

 

 

 

32

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Other current and noncurrent assets

 

 

89

 

 

 

(6,003

)

Other current liabilities

 

 

(2,131

)

 

 

3,727

 

Net cash used in operating activities

 

 

(7,368

)

 

 

(7,307

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(19,768

)

 

 

(28,282

)

Proceeds from maturities of marketable securities

 

 

17,160

 

 

 

37,640

 

Net cash (used in) provided by investing activities

 

 

(2,608

)

 

 

9,358

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuances of common stock, net of issuance costs

 

 

1,553

 

 

 

-

 

Net cash provided by financing activities

 

 

1,553

 

 

 

-

 

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

(8,423

)

 

 

2,051

 

Cash, cash equivalents and restricted cash at the beginning of the period

 

 

16,603

 

 

 

13,078

 

Cash, cash equivalents and restricted cash at the end of the period

 

$

8,180

 

 

$

15,129

 

 

See accompanying notes.

 

 

4


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2018

(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 months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 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, 2017, included in the Company’s Annual Report on Form 10-K. The accompanying condensed balance sheet as of December 31, 2017 has been derived from audited financial statements at that date.

Prior Period Reclassification

With the adoption of Accounting Standards Update, or ASU, No. 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash, or ASU No. 2016-18, the prior period presentation of cash and cash equivalents in the condensed statements of cash flows has been updated to conform with current period presentation. See “New Accounting Pronouncements – Recently Adopted” in this Note 1 on Summary of Significant Accounting Policies for further discussion of the adoption of ASU No. 2016-18.

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 consist of outstanding stock options 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 months ended March 31, 2018 and 2017, the diluted net loss per share calculation excludes potential common shares of 26,245,422 and 22,844,180, respectively, related to outstanding stock options and warrants 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 us 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, we evaluate our estimates, including those related to accrued liabilities, revenue recognition, fair value of marketable securities and equity investments, income taxes, and stock-based compensation. We base our estimates on historical experience and on various other market specific and relevant assumptions that we believe 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.

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

5


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2018

(UNAUDITED)

 

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 judged as other-than-temporary result in a charge to interest and other income. We have not recorded any other-than-temporary impairment charges on our available-for-sale securities for the three months ended March 31, 2018 and 2017. See Note 2 on Fair Value Measurements.

Equity Investments

With the adoption of ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01, beginning January 1, 2018, we measure our equity securities at fair value at each reporting period and changes in fair value are included in change in fair value of equity investment in our condensed statements of operations. See “New Accounting Pronouncements – Recently Adopted” in this Note 1 on Summary of Significant Accounting Policies for additional information on the adoption of ASU 2016-01.

Revenue Recognition

Beginning January 1, 2018, we recognize revenue in accordance with the provisions of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, or Topic 606. In determining the appropriate amount and timing of revenue to be recognized under this guidance, we perform the following five steps: (i) identify the contract(s) with our customer; (ii) identify the promised goods or services in the agreement and determine whether they are performance obligations, including whether they are distinct in the context of the agreement; (iii) measure the transaction price, including the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations based on stand-alone selling prices; and (v) recognize revenue when (or as) we satisfy each performance obligation. See “New Accounting Pronouncements – Recently Adopted” in this Note 1 on Summary of Significant Accounting Policies for further discussion of the adoption of Topic 606.

A performance obligation is a promise in an agreement to transfer a distinct good or service to the customer and is the unit of account in Topic 606. Significant management judgment is required to determine the level of effort required under an agreement and the period over which completion of the performance obligations is expected. If reasonable estimates regarding when performance obligations are either complete or substantially complete cannot be made, then revenue recognition is deferred until a reasonable estimate can be made. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.

We allocate the total transaction price to each performance obligation based on the estimated relative stand-alone selling prices of the promised goods or service underlying each performance obligation. Estimated selling prices for license rights are calculated using an income approach model and include the following key assumptions, judgments and estimates: the development timeline, revenue forecast, commercialization expenses, discount rate and probabilities of technical and regulatory success.

Following is a description of the principal activities from which we generate revenue. Collaboration revenue primarily represents amounts earned under the collaboration and license agreement, or Collaboration Agreement, with Janssen Biotech, Inc., or Janssen, for the imetelstat program. License fees and royalty revenue primarily represents amounts earned under agreements that out-license our technology to various companies.

License and/or Collaboration Agreements

In addition to the Collaboration Agreement (which is more fully described in Note 3 on Collaboration Agreement), we have entered into several license agreements with various oncology, diagnostics, research tools and biologics production companies. Economic terms in these agreements may include non-refundable upfront license payments in cash or equity securities, annual license maintenance fees, cost sharing arrangements, milestone payments, royalties on future sales of products, or any combination of these items. Non-refundable upfront fees, annual license maintenance fees and funding of research and development activities are considered fixed, while milestone payments and royalties are identified as variable consideration.

6


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2018

(UNAUDITED)

 

Licenses of Intellectual Property. If we determine the license to intellectual property is distinct from the other performance obligations identified in the agreement and the customer can use and benefit from the license, we recognize revenue from non-refundable upfront fees allocated to the license upon the completion of the transfer of the license to the customer. For such licenses, we recognize revenue from annual license maintenance fees upon the start of the new license period. For licenses that are bundled with other performance obligations, we assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable upfront fees or annual license maintenance fees. At each reporting period, we reassess the progress and, if necessary, adjust the measure of performance and related revenue recognition.

Milestone Payments. At the inception of each agreement that includes milestone payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone is included in the transaction price. For milestones that we do not deem to be probable of being achieved, the associated milestone payments are fully constrained and the value of the milestone is excluded from the transaction price with no revenue being recognized. Milestone payments that are not within our control, such as regulatory-related accomplishments, are not considered probable of being achieved until those accomplishments have been communicated by the relevant regulatory authority. Once the assessment of probability of achievement becomes probable, we recognize revenue for the milestone payment under collaboration revenue. At each reporting period, we assess the probability of achievement of each milestone under our current agreements.

Royalties. For agreements with sales-based royalties, including milestone payments based on the level of sales, where the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (a) when the related sales occur, or (b) when the performance obligation, to which some or all of the royalty has been allocated, has been satisfied (or partially satisfied). At each reporting period, we estimate the sales incurred by each licensee based on historical experience and accrue the associated royalty amount.

Cost Sharing Arrangements. Research and development and other expenses being shared by both parties under an agreement are recorded as earned or owed based on the performance obligations by both parties under the respective agreement. 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 over time in a manner proportionate to the costs we incurred to perform the services using the input method.

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

MARCH 31, 2018

(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 and employee stock purchases for the three months ended March 31, 2018 and 2017 which was allocated as follows:

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2018

 

 

2017

 

Research and development

 

$

155

 

 

$

291

 

General and administrative

 

 

1,459

 

 

 

1,692

 

Stock-based compensation expense included in operating expenses

 

$

1,614

 

 

$

1,983

 

 

As stock-based compensation expense recognized in our condensed statements of operations for the three months ended March 31, 2018 and 2017 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.

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 three months ended March 31, 2018 and 2017 has been estimated at the date of grant using the Black Scholes option-pricing model with the following assumptions:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Dividend yield

 

0%

 

 

0%

 

Expected volatility

 

 

0.821

 

 

 

0.892

 

Risk-free interest rate

 

2.55%

 

 

1.98%

 

Expected term

 

5.25 yrs

 

 

5.5 yrs

 

 Employee Stock Purchase Plan

The fair value of employees’ purchase rights during the three months ended March 31, 2018 and 2017 has been estimated using the Black Scholes option-pricing model with the following assumptions:

 

 

 

Three Months Ended March 31,

 

 

2018

 

2017

Dividend yield

 

0%

 

0%

Expected volatility range

 

0.437 to 0.475

 

0.577 to 0.641

Risk-free interest rate range

 

1.53% to 1.76%

 

0.45% to 0.89%

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.

8


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2018

(UNAUDITED)

 

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 stock-based 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

New Accounting Pronouncements – Recently Adopted

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-09, which amends the guidance for accounting for revenue from contracts with customers. This ASU superseded the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, or Topic 605, and created Topic 606.

We adopted Topic 606 on January 1, 2018 using the modified retrospective transition method for those agreements which were not completed as of January 1, 2018. Financial results for the reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 605.

In connection with the adoption of Topic 606, we recognized a cumulative-effect adjustment to our opening balance of accumulated deficit and an increase to interest and other receivables of $204,000 as of January 1, 2018 for projected sales-based royalties on product sales occurring in 2017 for which payments had not yet been received as of December 31, 2017. Such royalties were recognized as revenue in prior periods when payments were received from our licensees. In accordance with Topic 606-10-50-14a, we have elected to exclude providing further information about our sales-based royalties.

The adoption of Topic 606 did not result in any changes to the estimated transaction price or the performance obligations for current agreements or the amounts allocated to satisfied performance obligations. We do not have any deferred revenue associated with unsatisfied performance obligations. Since we view our operations as a single segment and all of our revenues are recognized at a point in time from similar license agreements, disaggregated revenue disclosures would not materially provide additional information. We do not expect the application of Topic 606 to have a material impact on our financial results on an ongoing basis in comparison to results that would have been realized if we had continued to apply Topic 605.

In January 2016, the FASB issued ASU 2016-01 which requires equity investments to be measured at fair value with changes in fair value recognized in the statements of operations. To further clarify ASU 2016-01, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2018-03, in February 2018. ASU 2018-03 requires application of a prospective transition approach only for those equity investments for which the new measurement alternative is being applied. We adopted ASU 2016-01 and ASU 2018-03 on January 1, 2018 using the modified retrospective transition method and recognized a cumulative-effect adjustment to our opening balance of accumulated deficit and other assets for the fair value of our equity investment. In accordance with ASU 2016-01, at the end of first quarter of 2018, we remeasured the fair value of our equity investment and included the change in fair value in change in fair value of equity investment in our condensed statements of operations. See Note 2 on Fair Value Measurements for additional information on our equity investment.

9


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2018

(UNAUDITED)

 

The cumulative-effect adjustments to our January 1, 2018 condensed balance sheet for the adoption of Topic 606 and ASU 2016-01 and ASU 2018-03 were as follows (in thousands):

Condensed Balance Sheet

 

Balance at

December 31, 2017

 

 

Adjustments Due to

Topic 606

 

 

Adjustments Due to

ASU 2016-01 and

ASU 2018-03

 

 

Balance at

January 1, 2018

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Interest and other receivables

 

$

436

 

 

$

204

 

 

$

-

 

 

$

640

 

     Other assets

 

$

-

 

 

$

-

 

 

$

1,189

 

 

$

1,189

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Accumulated deficit

 

$

(985,840

)

 

$

204

 

 

$

1,189

 

 

$

(984,447

)

As of January 1, 2018, we also adopted ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, ASU No. 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash, and ASU No. 2017-09, Compensation — Stock Compensation: Scope of Modification Accounting. With the adoption of ASU No. 2016-18, changes in the total of cash, cash equivalents and restricted cash are presented in our condensed statements of cash flows. The adoption of these new standards did not have a material impact on our financial statements and related disclosures.

New Accounting Pronouncements – Issued But Not Yet Adopted

In February 2016, the FASB issued ASU 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 lease arrangements 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 plan to adopt ASU 2016-02 on January 1, 2019.

2. FAIR VALUE MEASUREMENTS

Cash Equivalents and Marketable Securities

Cash equivalents, restricted cash and marketable securities by security type at March 31, 2018 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

 

$

5,383

 

 

$

-

 

 

$

-

 

 

$

5,383

 

Restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificate of deposit

 

$

268

 

 

$

-

 

 

$

-

 

 

$

268

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprise securities (due in

   less than one year)

 

$

10,000

 

 

$

-

 

 

$

(30

)

 

$

9,970

 

Commercial paper (due in less than one year)

 

 

11,923

 

 

 

7

 

 

 

(5

)

 

 

11,925

 

Corporate notes (due in less than one year)

 

 

60,201

 

 

 

-

 

 

 

(228

)

 

 

59,973

 

Corporate notes (due in one to two years)

 

 

13,259

 

 

 

-

 

 

 

(75

)

 

 

13,184

 

 

 

$

95,383

 

 

$

7

 

 

$

(338

)

 

$

95,052

 

 

10


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2018

(UNAUDITED)

 

Cash equivalents, restricted cash and marketable securities by security type at December 31, 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

 

$

11,030

 

 

$

-

 

 

$

-

 

 

$

11,030

 

Commercial paper

 

 

2,242

 

 

 

-

 

 

 

-

 

 

 

2,242

 

Corporate notes

 

 

1,750

 

 

 

-

 

 

 

(1

)

 

 

1,749

 

 

 

$

15,022

 

 

$

-

 

 

$

(1

)

 

$

15,021

 

Restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificate of deposit

 

$

268

 

 

$

-

 

 

$

-

 

 

$

268

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprise securities (due in less

   than one year)

 

$

12,500

 

 

$

-

 

 

$

(40

)

 

$

12,460

 

Commercial paper (due in less than one year)

 

 

10,928

 

 

 

4

 

 

 

(1

)

 

 

10,931

 

Corporate notes (due in less than one year)

 

 

55,067

 

 

 

-

 

 

 

(107

)

 

 

54,960

 

Corporate notes (due in one to two years)

 

 

14,303

 

 

 

-

 

 

 

(62

)

 

 

14,241

 

 

 

$

92,798

 

 

$

4

 

 

$

(210

)

 

$

92,592

 

 

Cash equivalents and marketable securities with unrealized losses that have been in a continuous unrealized loss position for less than 12 months and 12 months or longer at March 31, 2018 and December 31, 2017 were as follows:

 

 

 

Less Than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

 

Estimated

 

 

Unrealized

 

 

Estimated

 

 

Unrealized

 

 

Estimated

 

 

Unrealized

 

(In thousands)

 

Fair Value

 

 

Losses

 

 

Fair Value

 

 

Losses

 

 

Fair Value

 

 

Losses

 

As of March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprise securities (due

   in less than one year)

 

$

-

 

 

$

-

 

 

$

9,970

 

 

$

(30

)

 

$

9,970

 

 

$

(30

)

Commercial paper (due in less than one year)

 

 

8,958

 

 

 

(5

)

 

 

-

 

 

 

-

 

 

 

8,958

 

 

 

(5

)

Corporate notes (due in less than one year)

 

 

52,947

 

 

 

(210

)

 

 

6,527

 

 

 

(18

)

 

 

59,474

 

 

 

(228

)

Corporate notes (due in one to two years)

 

 

13,184

 

 

 

(75

)

 

 

-

 

 

 

-

 

 

 

13,184

 

 

 

(75

)

 

 

$

75,089

 

 

$

(290

)

 

$

16,497

 

 

$

(48

)

 

$

91,586

 

 

$

(338

)

As of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprise securities (due

   in less than one year)

 

$

-

 

 

$

-

 

 

$

12,460

 

 

$

(40

)

 

$

12,460

 

 

$

(40

)

Commercial paper (due in less than one year)

 

 

7,717

 

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

7,717

 

 

 

(1

)

Corporate notes (due in less than one year)

 

 

55,210

 

 

 

(106

)

 

 

1,499

 

 

 

(2

)

 

 

56,709

 

 

 

(108

)

Corporate notes (due in one to two years)

 

 

14,241

 

 

 

(62

)

 

 

-

 

 

 

-

 

 

 

14,241

 

 

 

(62

)

 

 

$

77,168

 

 

$

(169

)

 

$

13,959

 

 

$

(42

)

 

$

91,127

 

 

$

(211

)

 

The gross unrealized losses related to government-sponsored enterprise securities, commercial paper and corporate notes as of March 31, 2018 and December 31, 2017 were due to changes in interest rates and not credit risk. We determined that the gross unrealized losses on our marketable securities as of March 31, 2018 and December 31, 2017 were temporary in nature. We review our investments quarterly to identify and evaluate whether any investments have indications of possible other-than-temporary 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.

11


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2018

(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, corporate notes and equity investments 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 March 31, 2018 and December 31, 2017 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 March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

5,383

 

 

$

-

 

 

$

-

 

 

$

5,383

 

Government-sponsored enterprise securities(2)

 

 

-

 

 

 

9,970

 

 

 

-

 

 

 

9,970

 

Commercial paper(2)

 

 

-

 

 

 

11,925

 

 

 

-

 

 

 

11,925

 

Corporate notes(2)(3)

 

 

-

 

 

 

73,157

 

 

 

-

 

 

 

73,157

 

Equity investment(4)

 

 

-

 

 

 

1,064

 

 

 

-

 

 

 

1,064

 

Total

 

$

5,383

 

 

$

96,116

 

 

$

-

 

 

$

101,499

 

As of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

11,030

 

 

$

-

 

 

$

-

 

 

$

11,030

 

Government-sponsored enterprise securities(2)

 

 

-

 

 

 

12,460

 

 

 

-

 

 

 

12,460

 

Commercial paper(1)(2)

 

 

-

 

 

 

13,173

 

 

 

-

 

 

 

13,173

 

Corporate notes(1)(2)(3)

 

 

-

 

 

 

70,950

 

 

 

-

 

 

 

70,950

 

Total

 

$

11,030

 

 

$

96,583

 

 

$

-

 

 

$

107,613

 

 

(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.

(4)

Included in other assets on our condensed balance sheets. See “Equity Investment” in this Note 2 on Fair Value Measurements for further discussion of this equity investment.

12


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2018

(UNAUDITED)

 

Equity Investment

In December 2007, we received 13,842,625 ordinary shares in Sienna Cancer Diagnostics Limited, or Sienna, in connection with a license we granted to them for our human telomerase reverse transcriptase, or hTERT, technology for use in human diagnostics. The shares were recorded at a zero cost basis upon receipt under the cost method of accounting. On August 3, 2017, Sienna became a publicly traded company on the Australian Securities Exchange Limited, or ASX, under the ticker symbol SDX. In connection with Sienna’s initial public offering under Australian securities regulations, we signed a restriction agreement with Sienna which subjects our shares in Sienna to a 24-month trading restriction from the effective date of Sienna’s listing on the ASX. Due to this trading restriction, under the cost method of accounting, we maintained a zero cost basis for our shares in Sienna as of December 31, 2017. With the adoption of ASU 2016-01 and ASU 2018-03, as described in Note 1 on Summary of Significant Accounting Policies, our equity investment in Sienna must be reported at fair value and therefore, we recorded a cumulative-effect adjustment of $1,189,000 on our condensed balance sheet for the fair value of our shares in Sienna, as measured using the closing stock price reported on the ASX and converted to U.S. dollars as of January 1, 2018. Applying the same fair value measurement methodology in accordance with ASU 2016-01, we remeasured our shares in Sienna at a fair value of $1,064,000 as of March 31, 2018 and recognized the resulting change in fair value of $125,000 in change in fair value of equity investment in our condensed statements of operations.

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. Janssen is currently conducting two clinical trials of imetelstat: 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 March 31, 2018, accrued collaboration charges of $1,841,000 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 March 31, 2018.

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 March 2018, based on the rate of deaths occurring in the trial, the Joint Steering Committee of the collaboration determined that the protocol-specified primary analysis of IMbark, which includes an assessment of overall survival, will begin by the end of the second quarter of 2018. We expect Janssen to inform us of its decision by the end of the third quarter of 2018.  

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 and 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.

13


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2018

(UNAUDITED)

 

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.

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 or regulatory milestones, represent fully constrained variable consideration under Topic 606 as achievement of these milestones has not been deemed probable as of March 31, 2018. Royalties on future product sales of imetelstat, if successfully commercialized under the Collaboration Agreement, and any sales-based milestone payments will be recognized as revenue at the later of (a) when the related sales occur, or (b) when the performance obligation, to which some or all of the royalty has been allocated, has been satisfied (or partially satisfied) in accordance with Topic 606.

4. STOCKHOLDERS’ EQUITY

On August 28, 2015, we entered into an At Market Issuance Sales Agreement, or the 2015 Sales Agreement, with MLV & Co. LLC, or MLV, under which we could elect to issue and sell shares of our common stock having an aggregate offering price of up to $50,000,000. Pursuant to the 2015 Sales Agreement, common stock was sold at market prices prevailing at the time of sale through MLV as our sales agent. We paid MLV an aggregate commission rate equal to up to 3.0% of the gross proceeds of the sales price per share for common stock sold through MLV under the 2015 Sales Agreement.

In the first quarter of 2018, we sold an aggregate of 776,788 shares of our common stock pursuant to the 2015 Sales Agreement, resulting in net cash proceeds to us of approximately $1,553,000 after deducting sales commissions and offering expenses payable by us. For further discussion of our use of the 2015 Sales Agreement, see Note 5 on Subsequent Event.  

5. SUBSEQUENT EVENT

In April 2018, we completed the sale of the remaining common stock subject to the 2015 Sales Agreement and issued an aggregate of 12,418,318 shares of our common stock, resulting in net cash proceeds to us of approximately $46,098,000 after deducting sales commissions and offering expenses payable by us. In connection with the sale of our common stock under the 2015 Sales Agreement, deferred issuance costs of $50,000 have been included in other assets on our condensed balance sheet as of March 31, 2018. No further shares of common stock may be sold under the 2015 Sales Agreement. For further discussion of the 2015 Sales Agreement, see Note 4 on Stockholders’ Equity.

 

 

 

14


 

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, 2017, as filed with the Securities and Exchange Commission, or SEC, on March 16, 2018.

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 in essential thrombocythemia, or ET, myelofibrosis, or MF, and myelodysplastic syndromes, or MDS, suggest imetelstat may have disease‑modifying activity by inhibiting the progenitor cells of the malignant clones for the underlying diseases.

On November 13, 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 on December 15, 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 developing, manufacturing, seeking regulatory approval for, and commercialization of, imetelstat worldwide. The Collaboration Agreement provides for a joint governance structure which includes a Joint Steering Committee, or JSC, with equal membership from both companies. Information about the Collaboration Agreement should be reviewed in the context of the sections entitled “Risks Related to Our Collaboration with Janssen” and “Risks Related to Clinical Development, Regulatory Approval and Commercialization of Imetelstat” included in Part II, Item 1A, “Risk Factors” of this Form 10-Q.

Janssen is currently conducting two clinical trials of imetelstat: IMbark, a Phase 2 trial in MF, in which the first patient was dosed in September 2015 and the last patient was enrolled in October 2016; and IMerge, a Phase 2/3 trial in MDS, in which the first patient was dosed in January 2016. We contribute 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.

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. Key secondary endpoints include safety and overall survival. We expect an assessment of overall survival of this specifically defined relapsed and refractory MF patient population to provide important information for the imetelstat program, including for any potential

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future clinical trials, and that without an adequate improvement in survival, with the determination of adequacy to be assessed by Janssen in its sole discretion, Janssen would decide to discontinue the imetelstat program and terminate the Collaboration Agreement.

 

For IMbark, Janssen completed internal data reviews in September 2016, April 2017 and March 2018. In these data reviews, the JSC determined that the safety profile was consistent with prior clinical trials of imetelstat in hematologic malignancies, and no new safety signals were identified. In addition, the JSC determined that data from the 4.7 mg/kg dosing arm did not warrant further investigation of that starting dose and the 4.7 mg/kg arm was closed to new patient enrollment following the September 2016 data review. The JSC also determined that data supported 9.4 mg/kg as an appropriate starting dose in the trial. In addition, the JSC observed activity within multiple outcome measures with imetelstat treatment at the 9.4 mg/kg starting dose, suggesting potential clinical benefit in patients with MF who are relapsed after or refractory to prior treatment with a JAK inhibitor. However, the JSC observed that the spleen volume response rate in the 9.4 mg/kg dosing arm was less than that reported in clinical trials with JAK inhibitors in front-line MF patients, and that an insufficient number of patients met the protocol defined interim efficacy criteria to continue enrollment in the 9.4 mg/kg dosing arm. Thus, new patient enrollment in the 9.4 mg/kg dosing arm was suspended in October 2016. In March 2018, Janssen officially closed the trial to new patient enrollment. The JSC expects that the over 100 patients enrolled in IMbark to date will be adequate to assess overall survival. Patients who remain in the treatment phase of IMbark may continue to receive imetelstat, and until the protocol-specified primary analysis, all safety and efficacy assessments are being conducted as planned in the protocol, including following patients, to the extent possible, until death, to enable an assessment of overall survival. The JSC concluded that as of January 2018, median follow up was approximately 19 months, and median overall survival had not been reached in either dosing arm.

 

In March 2018, based on the rate of deaths occurring in the trial, the JSC determined that the protocol-specified primary analysis of IMbark, which includes an assessment of overall survival, will begin by the end of the second quarter of 2018, using a clinical cut-off date of April 26, 2018. Upon the protocol-specified primary analysis, the main trial will be completed. The IMbark protocol is being amended to establish an extension phase of the trial to enable patients remaining in the treatment phase to continue to receive imetelstat treatment, per investigator discretion. Following completion of the primary analysis, Janssen must notify us of its decision, or the Continuation Decision, whether to: (i) maintain the license rights granted under the Collaboration Agreement and continue the development of imetelstat or (ii) discontinue the development of imetelstat and terminate the Collaboration Agreement. We expect Janssen to inform us of its decision by the end of the third quarter of 2018.

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. 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 RBC-TI lasting at least 24 weeks, amount and relative change in red blood cell transfusions and hematologic improvement.

For IMerge, Janssen completed internal data reviews in September 2016 and April 2017. In addition, preliminary data from Part 1 of IMerge were presented at the American Society of Hematology Annual Meeting, or ASH, in December 2017. These data showed that among the 32 red blood cell transfusion-dependent MDS patients enrolled in Part 1of the trial, a subset of 13 patients who had not received prior treatment with either a hypomethylating agent or lenalidomide and did not have a deletion 5q chromosomal abnormality, who are frequently identified as “non-del(5q)” patients, exhibited an increased rate and durability of transfusion independence compared to the overall trial population. Approximately half of the 13-patient subset population achieved ≥8-week RBC-TI after treatment with imetelstat, and almost one-third of the subset population achieved ≥24-week RBC-TI. 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 frequently reported adverse events were cytopenias, which were predictable, manageable and reversible, in most cases, including Grade 3 and 4, or severe, neutropenia and thrombocytopenia. In addition, reported adverse events did not differ significantly between the overall trial population and the 13-patient subset. Based on the preliminary data from this 13-patient subset, Janssen has expanded new patient enrollment in Part 1 of IMerge to enroll approximately 20 additional patients to increase the experience and confirm the benefit-risk profile of imetelstat in this refined target patient population. In November 2017, the first patient was dosed in the expanded Part 1of IMerge and enrollment was completed in February 2018.

Janssen has not committed to begin Part 2 of IMerge. We believe Janssen will initiate Part 2 only following an affirmative Continuation Decision, if any.

Janssen could discontinue the imetelstat program and terminate the Collaboration Agreement at any time, such as, before the start of the IMbark primary analysis, and for any reason, irrespective of whether there is data from IMbark suggesting an adequate improvement in survival in relapsed or refractory MF or whether there is sufficient data from the additional patients enrolled in the expanded Part 1 of IMerge to support the benefit-risk profile of imetelstat in lower risk MDS in the refined target patient population.

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In this regard, we believe that without an adequate improvement in survival in relapsed or refractory MF, with the determination of adequacy to be assessed by Janssen in its sole discretion, Janssen would decide to discontinue the imetelstat program and terminate the Collaboration Agreement.

Financial Overview

We had approximately $103.2 million in cash, cash equivalents, restricted cash and current and noncurrent marketable securities as of March 31, 2018. 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 March 31, 2018, we had an accumulated deficit of $991.6 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 obtaining sufficient efficacy and safety data from the additional patients enrolled in Part 1 of IMerge and/or obtaining longer-term efficacy and safety data from IMbark to enable an assessment of overall survival, 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 on our own and 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 three months ended March 31, 2018 as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017, other than the adoption of the new accounting pronouncements on January 1, 2018 as described below.

Our condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles 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.

Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes historically have been minor and have been included in the condensed financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our condensed financial statements are fairly stated in accordance with accounting principles generally accepted in the United States, and present a meaningful presentation of our financial condition and results of operations.

New Accounting Pronouncements – Recently Adopted

Revenue Recognition

On January 1, 2018, we adopted the provisions of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, or Topic 606, using the modified retrospective transition method as discussed in the subsection entitled, “New Accounting

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Pronouncements – Recently Adopted”, in Note 1 of Notes to Condensed Financial Statements of this Form 10-Q. Financial results for the reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Accounting Standards Codification Topic 605, Revenue Recognition, or Topic 605, and therefore, there is a lack of comparability to the prior periods presented. In connection with the adoption of Topic 606, we recognized a cumulative-effect adjustment to our opening balance of accumulated deficit and an increase to interest and other receivables as of January 1, 2018 for projected sales-based royalties on product sales occurring in 2017 for which payments had not yet been received as of December 31, 2017. Such royalties were recognized as revenue in prior periods when payments were received from our licensees.

In determining the appropriate amount and timing of revenue to be recognized under Topic 606, we perform the following five steps: (i) identify the contract(s) with our customer; (ii) identify the promised goods or services in the agreement and determine whether they are performance obligations, including whether they are distinct in the context of the agreement; (iii) measure the transaction price, including the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations based on stand-alone selling prices; and (v) recognize revenue when (or as) we satisfy each performance obligation. Significant management judgment is required to determine the level of effort required under an agreement and the period over which completion of the performance obligations is expected. If reasonable estimates regarding when performance obligations are either complete or substantially complete cannot be made, then revenue recognition is deferred until a reasonable estimate can be made. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.

We allocate the total transaction price to each performance obligation based on the estimated relative stand-alone selling prices of the promised goods or service underlying each performance obligation. Estimated selling prices for license rights are calculated using an income approach model and include the following key assumptions, judgments and estimates: the development timeline, revenue forecast, commercialization expenses, discount rate and probabilities of technical and regulatory success.

Our revenues primary consist of collaboration revenue and license fees and royalties. Collaboration revenue primarily represents amounts earned under the Collaboration Agreement with Janssen for the imetelstat program. License fees and royalty revenue primarily represents amounts earned under agreements that out-license our technology to various oncology, diagnostics, research tools and biologics production companies. Economic terms in these agreements may include non-refundable upfront license payments in cash or equity securities, annual license maintenance fees, cost sharing arrangements, milestone payments, royalties on future sales of products, or any combination of these items. Non-refundable upfront fees, annual license maintenance fees and funding of research and development activities are considered fixed, while milestone payments and royalties are identified as variable consideration.

Licenses of Intellectual Property. If we determine the license to intellectual property is distinct from the other performance obligations identified in the agreement and the customer can use and benefit from the license, we recognize revenue from non-refundable upfront fees allocated to the license upon the completion of the transfer of the license to the customer. For such licenses, we recognize revenue from annual license maintenance fees upon the start of the new license period. For licenses that are bundled with other performance obligations, we assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable upfront fees or annual license maintenance fees. At each reporting period, we reassess the progress and, if necessary, adjust the measure of performance and related revenue recognition.

Milestone Payments. At the inception of each agreement that includes milestone payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone is included in the transaction price. For milestones that we do not deem to be probable of being achieved, the associated milestone payments are fully constrained and the value of the milestone is excluded from the transaction price with no revenue being recognized. Milestone payments that are not within our control, such as regulatory-related accomplishments, are not considered probable of being achieved until those accomplishments have been communicated by the relevant regulatory authority. Once the assessment of probability of achievement becomes probable, we recognize revenue for the milestone payment under collaboration revenue. At each reporting period, we assess the probability of achievement of each milestone under our current agreements.

Royalties. For agreements with sales-based royalties, including milestone payments based on the level of sales, where the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of: (a) when the related sales occur, or (b) when the performance obligation, to which some or all of the royalty has been allocated, has been satisfied (or partially satisfied). At each reporting period, we estimate the sales incurred by each licensee based on historical experience and accrue the associated royalty amount.

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Cost Sharing Arrangements. Research and development and other expenses being shared by both parties under an agreement are recorded as earned or owed based on the performance obligations by both parties under the respective agreement. 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 over time in a manner proportionate to the costs we incurred to perform the services using the input method.

Equity Investment

We adopted Accounting Standards Update No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01, on January 1, 2018. Under ASU 2016-1, equity securities are measured at fair value at each reporting period and any changes in fair value are included in change in fair value of equity investment in our condensed statements of operations. Upon the adoption of ASU 2016-01, we recognized a cumulative-effect adjustment to our opening balance of accumulated deficit and other assets for the fair value of our equity investment in Sienna Cancer Diagnostics Limited, or Sienna. As of March 31, 2018, we remeasured the fair value of our equity investment in Sienna in accordance with ASU 2016-01 and included the change in fair value in change in fair value of equity investment in our condensed statements of operations for the three months ended March 31, 2018. The fair value of our equity investment in Sienna is subject to volatility and could adversely affect our future operating results. See Note 2 on Fair Value Measurements for additional information on our equity investment in Sienna.

RESULTS OF OPERATIONS

Our results of operations have fluctuated from period to period and may continue to fluctuate in the future, based primarily upon the continuation of the collaboration with Janssen and the related progress, if any, of the development and commercialization of the imetelstat program and whether we are able to acquire and/or in-license other oncology products, product candidates, programs or companies in order to grow and diversify our business. Results of operations for any period may be unrelated to results of operations for any other period. Thus, historical results should not be viewed as indicative of future operating results. For example, in 2015 we reported net income for the first time due to recognition of revenue in connection with the upfront payment from Janssen under the Collaboration Agreement. However, we expect to incur operating losses in the future as clinical development activities for imetelstat continue under our Collaboration Agreement with Janssen, and our operating losses may increase in size. We are subject to risks common to companies in our industry and at our stage of development, including, but not limited to, risks inherent in research and development efforts, our dependence on Janssen for the development, manufacture, regulatory approval for and commercialization of, imetelstat, uncertainty of preclinical and clinical trial results or regulatory approvals or clearances, the future development of imetelstat, including any future efficacy or safety results that may cause the benefit-risk profile of imetelstat to become unacceptable, the possibility that Janssen could discontinue the imetelstat program and terminate the Collaboration Agreement at any time and for any reason, irrespective of whether there is data from IMbark suggesting an adequate improvement in survival in relapsed or refractory MF, with the determination of adequacy to be assessed by Janssen in its sole discretion, or whether there is sufficient data from the additional patients enrolled in the expanded Part 1 of IMerge to support the benefit-risk profile of imetelstat in lower risk MDS in the refined target patient population, our need for future capital, enforcement of our patent and proprietary rights, reliance upon our collaborators, licensees, investigators and other third parties, and potential competition. In order for imetelstat to be commercialized, we are wholly dependent on Janssen to conduct preclinical tests and clinical trials to demonstrate the safety and efficacy of imetelstat, obtain regulatory approvals or clearances and enter into manufacturing, distribution and marketing arrangements, as well as obtain market acceptance. We do not expect to receive royalties based on sales of imetelstat for many years, if at all.

Revenues

In addition to the Collaboration Agreement with Janssen for imetelstat, we have entered into several license or collaboration agreements with companies involved with oncology, diagnostics, research tools and biologics production, whereby we have granted certain rights to our non-imetelstat related technologies. In connection with these agreements, we are eligible to receive license fees, option fees, milestone payments and royalties on future sales of products, or any combination thereof. As discussed above, we adopted Topic 606 using the modified retrospective transition method on January 1, 2018. As a result, prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 605 and therefore, there is a lack of comparability to the prior periods presented. However, we do not expect the application of Topic 606 to have a material impact on our financial results on an ongoing basis in comparison to the results that would have been realized if we had continued to apply Topic 605.

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We recognized license fee revenues of $248,000 for the three months ended March 31, 2018, compared to $409,000 for the same period in 2017 related to our various agreements. The decrease in license fee revenues for the three months ended March 31, 2018 compared to the same period in 2017 primarily reflects a reduction in the number of active license agreements in the first quarter of 2018 for research licenses related to our human telomerase reverse transcriptase, of hTERT, technology compared to the first quarter of 2017. We recognized royalty revenues of $70,000 for the three months ended March 31, 2018, compared to $128,000 for the same period in 2017. The decrease in royalty revenues for the three months ended March 31, 2018 compared to the same period in 2017 reflects overall lower product sales by our licensees and a change in the method that revenue is being recognized for royalties upon the adoption of Topic 606 as of January 1, 2018. Under Topic 606, we estimate sales-based royalties earned on product sales by our licensees in each reporting period and accrue the associated royalty amount. In prior periods, revenue from royalties was being recognized when payments were received from our licensees.

Future license fee and royalty revenues are dependent on additional agreements being signed, if any, current agreements being maintained and the underlying patent rights for the licenses remaining active. We expect license fee and royalty revenues under our license agreements related to our hTERT technology to be lower in 2018 than in previous years, and to be eliminated by the end of 2019, due to upcoming patent expirations on such technology. Current revenues may not be predictive of future revenues.

Research and Development Expenses

During the three months ended March 31, 2018 and 2017, imetelstat was the sole research and development program we supported. For the imetelstat research and development program, we incur direct external, personnel related and other research and development costs. For the three months ended March 31, 2018 and 2017, direct external expenses primarily consisted of our proportionate share of clinical development costs incurred by Janssen under the Collaboration Agreement. Personnel related expenses primarily consist of salaries and wages, stock-based compensation, payroll taxes and benefits for Geron employees involved with ongoing research and development efforts. Other research and development expenses primarily consist of research related overhead associated with allocated expenses for rent and maintenance of facilities and other supplies.

Research and development expenses were $2.4 million for the three months ended March 31, 2018, compared to $3.4 million for the same period in 2017. The decrease in research and development expenses for the three months ended March 31, 2018 compared to the same period in 2017 primarily reflects lower direct external costs for our proportionate share of clinical development expenses under the collaboration with Janssen and reduced personnel related expenses due to reduced stock-based compensation expense.

Research and development expenses for the three months ended March 31, 2018 and 2017 were as follows:

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2018

 

 

2017

 

 

 

(Unaudited)

 

Direct external expenses

 

$

1,887

 

 

$

2,586

 

Personnel related expenses

 

 

414

 

 

 

608

 

All other expenses

 

 

139

 

 

 

180

 

Total research and development expenses

 

$

2,440

 

 

$

3,374

 

 

At this time, we cannot provide reliable estimates of how much time or investment will be necessary to enable imetelstat to be commercialized. For a more complete discussion of the risks and uncertainties associated with the development of imetelstat in collaboration with Janssen, see the sub-sections entitled, “Risks Related to Our Collaboration with Janssen” and “Risks Related to Clinical Development, Regulatory Approval and Commercialization of Imetelstat”, in Part II, Item 1A entitled “Risk Factors” and elsewhere in this Form 10-Q.

General and Administrative Expenses

General and administrative expenses were $5.3 million for the three months ended March 31, 2018, compared to $4.7 million for the same period in 2017. The increase in general and administrative expenses for the three months ended March 31, 2018 compared to the same period in 2017 primarily reflects higher legal and consulting expenses in connection with our business development activities. We expect general and administrative expenses to remain consistent during the remainder of 2018.

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Interest and Other Income

Interest and other income was $394,000 for the three months ended March 31, 2018, compared to $332,000 for the same period in 2017. The increase in interest and other income for the three months ended March 31, 2018 compared to the same period in 2017 primarily reflects higher yields on our marketable securities portfolio. Interest earned in future periods will depend on the size of our marketable securities portfolio and prevailing interest rates.

Change in Fair Value of Equity Investment

With the adoption of ASU 2016-01 on January 1, 2018, as noted above, the change in the fair value of our equity investment in Sienna of approximately $125,000 has been included in our condensed statements of operations for the three months ended March 31, 2018. No comparable amounts were incurred for the three months ended March 31, 2017. The fair value of our equity investment in Sienna fluctuates based on changes in Sienna’s stock price and is therefore subject to volatility that could adversely affect our future operating results.

Interest and Other Expense

Interest and other expense was $18,000 for the three months ended March 31, 2018, compared to $21,000 for the same period in 2017. Interest and other expense primarily reflects bank charges related to our cash operating accounts and marketable securities portfolio.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2018, we had cash, restricted cash, cash equivalents, and current and noncurrent marketable securities of $103.2 million, compared to $109.2 million at December 31, 2017. The overall decrease in cash, restricted cash, cash equivalents, and current and noncurrent marketable securities during the three months ended March 31, 2018 was the net result of cash being used for operations, partially offset by proceeds from the sales of common stock under our At Market Issuance Sales Agreement, or the 2015 Sales Agreement, with MLV & Co. LLC, or MLV. We expect to experience negative cash flow for the foreseeable future as the development of imetelstat continues in collaboration with Janssen. We estimate that our existing capital resources and future interest income will be sufficient to fund our current level of operations through at least the next 12 months. However, we may use our available capital resources sooner than we anticipate. For example, in order 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, seek equity capital or both. In additi