gern-10q_20180630.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 June 30, 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 July 24, 2018:

Common Stock, $0.001 par value

 

183,622,026 shares

 

 

 


GERON CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2018

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1:

 

Condensed Financial Statements (Unaudited)

 

1

 

 

Condensed Balance Sheets as of June 30, 2018 and December 31, 2017

 

1

 

 

Condensed Statements of Operations for the three and six months ended June 30, 2018 and 2017

 

2

 

 

Condensed Statements of Comprehensive Loss for the three and six months ended June 30, 2018 and 2017

 

3

 

 

Condensed Statements of Cash Flows for the six months ended June 30, 2018 and 2017

 

4

 

 

Notes to Condensed Financial Statements

 

5

Item 2:

 

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

 

16

Item 3:

 

Quantitative and Qualitative Disclosures About Market Risk

 

25

Item 4:

 

Controls and Procedures

 

25

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1:

 

Legal Proceedings

 

26

Item 1A:

 

Risk Factors

 

26

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

59

Item 3:

 

Defaults Upon Senior Securities

 

59

Item 4:

 

Mine Safety Disclosures

 

59

Item 5:

 

Other Information

 

59

Item 6:

 

Exhibits

 

59

 

 

SIGNATURE

 

60

 

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1.

CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

GERON CORPORATION

CONDENSED BALANCE SHEETS

(IN THOUSANDS)

 

 

 

JUNE 30,

 

 

DECEMBER 31,

 

 

 

2018

 

 

2017

 

 

 

(UNAUDITED)

 

 

(NOTE 1)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,127

 

 

$

16,335

 

Restricted cash

 

 

269

 

 

 

268

 

Marketable securities

 

 

141,800

 

 

 

78,351

 

Interest and other receivables

 

 

773

 

 

 

436

 

Prepaid assets

 

 

301

 

 

 

580

 

Total current assets

 

 

162,270

 

 

 

95,970

 

Noncurrent marketable securities

 

 

20,250

 

 

 

14,241

 

Property and equipment, net

 

 

71

 

 

 

102

 

Other assets

 

 

676

 

 

 

-

 

 

 

$

183,267

 

 

$

110,313

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

458

 

 

$

503

 

Accrued compensation and benefits

 

 

1,531

 

 

 

3,385

 

Accrued collaboration charges

 

 

2,192

 

 

 

1,702

 

Other accrued liabilities

 

 

724

 

 

 

926

 

Total current liabilities

 

 

4,905

 

 

 

6,516

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock

 

 

183

 

 

 

160

 

Additional paid-in capital

 

 

1,176,823

 

 

 

1,089,684

 

Accumulated deficit

 

 

(998,567

)

 

 

(985,840

)

Accumulated other comprehensive loss

 

 

(77

)

 

 

(207

)

Total stockholders' equity

 

 

178,362

 

 

 

103,797

 

 

 

$

183,267

 

 

$

110,313

 

 

See accompanying notes.

1


 

GERON CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

 

 

 

THREE MONTHS ENDED

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

 

JUNE 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License fees and royalties

 

$

208

 

 

$

174

 

 

$

526

 

 

$

711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

3,204

 

 

 

2,499

 

 

 

5,644

 

 

 

5,873

 

General and administrative

 

 

4,246

 

 

 

4,406

 

 

 

9,561

 

 

 

9,063

 

Total operating expenses

 

 

7,450

 

 

 

6,905

 

 

 

15,205

 

 

 

14,936

 

Loss from operations

 

 

(7,242

)

 

 

(6,731

)

 

 

(14,679

)

 

 

(14,225

)

Interest and other income

 

 

717

 

 

 

346

 

 

 

1,111

 

 

 

678

 

Change in fair value of equity investment

 

 

(350

)

 

 

-

 

 

 

(475

)

 

 

-

 

Other expense

 

 

(59

)

 

 

(20

)

 

 

(77

)

 

 

(41

)

Net loss

 

$

(6,934

)

 

$

(6,405

)

 

$

(14,120

)

 

$

(13,588

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.04

)

 

$

(0.04

)

 

$

(0.08

)

 

$

(0.09

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing basic and diluted net loss per share

 

 

174,475,244

 

 

 

159,182,367

 

 

 

167,538,530

 

 

 

159,171,959

 

 

See accompanying notes.

2


 

GERON CORPORATION

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(IN THOUSANDS)

(UNAUDITED)

 

 

 

THREE MONTHS ENDED

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

 

JUNE 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(6,934

)

 

$

(6,405

)

 

$

(14,120

)

 

$

(13,588

)

Net unrealized gain (loss) on marketable securities

 

 

254

 

 

 

(8

)

 

 

130

 

 

 

(26

)

Comprehensive loss

 

$

(6,680

)

 

$

(6,413

)

 

$

(13,990

)

 

$

(13,614

)

 

See accompanying notes.

3


 

GERON CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(14,120

)

 

$

(13,588

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

31

 

 

 

38

 

Loss on retirement of property and equipment

 

 

-

 

 

 

5

 

Accretion and amortization on investments, net

 

 

(111

)

 

 

144

 

Change in fair value of equity investment, including foreign currency translation

 

 

513

 

 

 

-

 

Stock-based compensation for services by non-employees

 

 

120

 

 

 

115

 

Stock-based compensation for employees and directors

 

 

3,159

 

 

 

4,058

 

Amortization related to 401(k) contributions

 

 

10

 

 

 

32

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Current assets

 

 

146

 

 

 

(5,954

)

Current liabilities

 

 

(1,611

)

 

 

3,405

 

Net cash used in operating activities

 

 

(11,863

)

 

 

(11,745

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(107,067

)

 

 

(60,436

)

Proceeds from maturities of marketable securities

 

 

37,850

 

 

 

65,940

 

Net cash (used in) provided by investing activities

 

 

(69,217

)

 

 

5,504

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuances of common stock, net of issuance costs

 

 

83,873

 

 

 

37

 

Net cash provided by financing activities

 

 

83,873

 

 

 

37

 

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

 

 

2,793

 

 

 

(6,204

)

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

 

$

19,396

 

 

$

6,874

 

 

See accompanying notes.

 

 

4


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

JUNE 30, 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 six months ended June 30, 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 and six months ended June 30, 2018 and 2017, the diluted net loss per share calculation excludes potential common shares of 26,306,263 and 23,044,422, 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 debt 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

5


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2018

(UNAUDITED)

 

losses are included in interest and other income and are derived using the specific identification method for determining the cost of securities sold and have been insignificant to date. Dividend and interest income are recognized when earned and included in interest and other income in our condensed statements of operations. We recognize a charge when the declines in the fair values below the amortized cost bases 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 and six months ended June 30, 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. Changes in fair value resulting from observable price changes are included in change in fair value of equity investment and changes in fair value resulting from foreign currency translation are included in other expense 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 and the period over which completion of the performance obligations is expected under an agreement. 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 services 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

JUNE 30, 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 licensee 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 licensee. 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 of clinical trial costs 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

JUNE 30, 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 and six months ended June 30, 2018 and 2017 which was allocated as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development

 

$

266

 

 

$

250

 

 

$

421

 

 

$

541

 

General and administrative

 

 

1,279

 

 

 

1,825

 

 

 

2,738

 

 

 

3,517

 

Stock-based compensation expense included in operating expenses

 

$

1,545

 

 

$

2,075

 

 

$

3,159

 

 

$

4,058

 

 

As stock-based compensation expense recognized in our condensed statements of operations for the three and six months ended June 30, 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 six months ended June 30, 2018 and 2017 has been estimated at the date of grant using the Black Scholes option-pricing model with the following assumptions:

 

 

 

Six Months Ended June 30,

 

 

2018

 

2017

Dividend yield

 

0%

 

0%

Expected volatility range

 

0.821 to 0.832

 

0.884 to 0.892

Risk-free interest rate range

 

2.55% to 2.94%

 

1.98% to 1.99%

Expected term

 

5.25 yrs

 

5.5 yrs

 Employee Stock Purchase Plan

The fair value of employees’ purchase rights during the six months ended June 30, 2018 and 2017 has been estimated using the Black Scholes option-pricing model with the following assumptions:

 

 

 

Six Months Ended June 30,

 

 

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

JUNE 30, 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 Sienna Cancer Diagnostics Limited, or Sienna. In accordance with ASU 2016-01, we remeasured the fair value of our equity investment in Sienna at each reporting date in 2018 and included the change in fair value resulting from observable price changes in change in fair value of equity investment and the change in fair value resulting from foreign currency translation in other expense in our condensed statements of operations. See Note 2 on Fair Value Measurements for additional information on our equity investment in Sienna.

9


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

JUNE 30, 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. We plan to adopt ASU 2016-02 on January 1, 2019 using a modified retrospective approach. In evaluating the impact of adopting the new lease guidance, we have determined that our current operating lease for our office space will require us to record an asset and an obligation for the arrangement upon adoption of ASU 2016-02. We are also evaluating other facilities and equipment service contracts to determine whether there are any embedded lease arrangements requiring recognition of an asset and an obligation.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, or ASU 2018-07, to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The new guidance applies to nonemployee awards issued in exchange for goods or services used or consumed in an entity’s own operations. There are no new disclosure requirements. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including in an interim period for which financial statements have not been issued. We are currently evaluating the impact that the adoption of ASU 2018-07 will have on our financial statements and plan to adopt ASU 2018-07 on January 1, 2019.

10


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2018

(UNAUDITED)

 

2. FAIR VALUE MEASUREMENTS

Cash Equivalents and Marketable Securities

Cash equivalents, restricted cash and marketable securities by security type at June 30, 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

 

$

11,450

 

 

$

-

 

 

$

-

 

 

$

11,450

 

Commercial paper

 

 

5,689

 

 

 

1

 

 

 

(1

)

 

 

5,689

 

 

 

$

17,139

 

 

$

1

 

 

$

(1

)

 

$

17,139

 

Restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificate of deposit

 

$

269

 

 

$

-

 

 

$

-

 

 

$

269

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprise securities (due in

   less than one year)

 

$

10,000

 

 

$

-

 

 

$

(10

)

 

$

9,990

 

Commercial paper (due in less than one year)

 

 

56,917

 

 

 

181

 

 

 

(4

)

 

 

57,094

 

Corporate notes (due in less than one year)

 

 

74,930

 

 

 

-

 

 

 

(214

)

 

 

74,716

 

Corporate notes (due in one to two years)

 

 

20,280

 

 

 

-

 

 

 

(30

)

 

 

20,250

 

 

 

$

162,127

 

 

$

181

 

 

$

(258

)

 

$

162,050

 

 

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

 

 

11


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2018

(UNAUDITED)

 

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 June 30, 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 June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprise securities (due

   in less than one year)

 

$

-

 

 

$

-

 

 

$

9,990

 

 

$

(10

)

 

$

9,990

 

 

$

(10

)

Commercial paper (due in less than one year)

 

 

10,639

 

 

 

(5

)

 

 

-

 

 

 

-

 

 

 

10,639

 

 

 

(5

)

Corporate notes (due in less than one year)

 

 

62,975

 

 

 

(184

)

 

 

10,241

 

 

 

(30

)

 

 

73,216

 

 

 

(214

)

Corporate notes (due in one to two years)

 

 

20,250

 

 

 

(30

)

 

 

-

 

 

 

-

 

 

 

20,250

 

 

 

(30

)

 

 

$

93,864

 

 

$

(219

)

 

$

20,231

 

 

$

(40

)

 

$

114,095

 

 

$

(259

)

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 June 30, 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 June 30, 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.

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

12


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2018

(UNAUDITED)

 

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 June 30, 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 June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

11,450

 

 

$

-

 

 

$

-

 

 

$

11,450

 

Government-sponsored enterprise securities(2)

 

 

-

 

 

 

9,990

 

 

 

-

 

 

 

9,990

 

Commercial paper(1)(2)

 

 

-

 

 

 

62,783

 

 

 

-

 

 

 

62,783

 

Corporate notes(2)(3)

 

 

-

 

 

 

94,966

 

 

 

-

 

 

 

94,966

 

Equity investment(4)

 

 

-

 

 

 

676

 

 

 

-

 

 

 

676

 

Total

 

$

11,450

 

 

$

168,415

 

 

$

-

 

 

$

179,865

 

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.

Equity Investment

In December 2007, we received 13,842,625 ordinary shares in 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. As of June 30, 2018, the fair value of our shares in Sienna was $676,000.  In accordance with ASU 2016-01, we remeasured the fair value of our shares in Sienna at each reporting date in 2018 and recognized the resulting change in fair value of $388,000 and $513,000, respectively, for the three and six months ended June 30, 2018, both of which include a loss of $38,000 related to foreign currency translation.

 

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

13


GERON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2018

(UNAUDITED)

 

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 bet