FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2012

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

2. FAIR VALUE MEASUREMENTS

        We categorize financial instruments recorded at fair value on our consolidated 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 the 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 instruments measured at fair value on our consolidated balance sheets, including the category for such instruments.

Cash Equivalents and Marketable Securities Available-for-Sale

        Certificates of deposit and 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. Treasury securities, U.S. government-sponsored enterprise securities, municipal securities, corporate notes and commercial paper 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.

        Cash equivalents, restricted cash and marketable securities by security type at December 31, 2012 were as follows:

	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In thousands)
Included in cash and cash equivalents:
Money market funds	$	15,660	$	—	$	—		$	15,660
Corporate notes		3,136		—		(1	)		3,135
	$	18,796	$	—	$	(1	)	$	18,795
Restricted cash:
Certificates of deposit	$	794	$	—	$	—		$	794
Marketable securities:
Government-sponsored enterprise securities (due in less than 1 year)	$	8,618	$	5	$	—		$	8,623
Commercial paper (due in less than 1 year)		20,623		21		—			20,644
Corporate notes (due in less than 1 year)		44,190		22		(7	)		44,205
	$	73,431	$	48	$	(7	)	$	73,472

        Cash equivalents, restricted cash and marketable securities by security type at December 31, 2011 were as follows:

	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In thousands)
Included in cash and cash equivalents:
Money market funds	$	12,885	$	—	$	—		$	12,885
Restricted cash:
Certificates of deposit	$	793	$	—	$	—		$	793
Marketable securities:
Certificate of deposit (due in less than 1 year)	$	329	$	—	$	—		$	329
Government-sponsored enterprise securities (due in less than 1 year)		15,061		25		(1	)		15,085
Government-sponsored enterprise securities (due in 1 to 2 years)		6,998		18		(12	)		7,004
Commercial paper (due in less than 1 year)		39,206		41		—			39,247
Corporate notes (due in less than 1 year)		50,556		19		(28	)		50,547
Corporate notes (due in 1 to 2 years)		25,113		30		(14	)		25,129
	$	137,263	$	133	$	(55	)	$	137,341

        Marketable securities with unrealized losses at December 31, 2012 and 2011 were as follows:

	Less Than 12 Months					12 Months or Greater				Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
	(In thousands)
As of December 31, 2012:
Corporate notes (due in less than 1 year)	$	27,045	$	(8	)	$	—	$	—	$	27,045	$	(8	)
As of December 31, 2011:
Government-sponsored enterprise securities (due in less than 1 year)	$	5,021	$	(1	)	$	—	$	—	$	5,021	$	(1	)
Government-sponsored enterprise securities (due in 1 to 2 years)		3,988		(12	)		—		—		3,988		(12	)
Corporate notes (due in less than 1 year)		33,847		(28	)		—		—		33,847		(28	)
Corporate notes (due in 1 to 2 years)		13,096		(14	)		—		—		13,096		(14	)
	$	55,952	$	(55	)	$	—	$	—	$	55,952	$	(55	)

        The gross unrealized losses related to government-sponsored enterprise securities and corporate notes as of December 31, 2012 and 2011 were due to changes in interest rates. We determined that the gross unrealized losses on our marketable securities as of December 31, 2012 and 2011 were temporary in nature. We review our investments quarterly to identify and evaluate whether any investments have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which the fair value has been less than the 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. We currently do not intend to sell these securities before recovery of their amortized cost basis.

        In 2011, we received proceeds of $809,000 from the sale of a corporate note. In connection with the sale, we recognized a realized loss of $2,000.

Derivatives

        Non-employee options are normally traded less actively, have trade activity that is one way, and/or traded in less-developed markets and are therefore valued based upon models with significant unobservable market parameters, resulting in Level 3 categorization.

        Options held by non-employees whose performance obligations are complete are classified as derivative liabilities on our consolidated balance sheets. Upon the exercise of these options, the instruments are marked to fair value and reclassified from derivative liabilities to stockholders' equity. There were no reclassifications from current liabilities to stockholders' equity for non-employee option exercises in 2012 and 2011.

        As of December 31, 2012 and 2011, the following non-employee options to purchase common stock were considered derivatives and classified as current liabilities:

			Number of Shares at December 31,						Fair Value at December 31,
	Exercise Price						Exercisable Date	Expiration Date
Issuance Date			2012		2011				2012		2011
									(In thousands)
March 2005	$	6.39		284,600		284,600	January 2007	March 2015	$	51	$	64

        The fair value of derivatives has been calculated at each reporting date using the Black Scholes option-pricing model with the following assumptions:

	December 31,
	2012	2011
Dividend yield	None	None
Expected volatility	0.828	0.714
Risk-free interest rate	0.25%	0.36%
Expected term	2 yrs	3 yrs

        Dividend yield is based on historical cash dividend payments and Geron has paid no dividends to date. The expected volatility is based on historical volatilities of our stock since traded options on Geron stock do not correspond to derivatives' terms and trading volume of Geron 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 reporting date. The expected term of derivatives is equal to the remaining contractual term of the instrument.

Fair Value on a Recurring Basis

        The following table presents information about our financial instruments that are measured at fair value on a recurring basis as of December 31, 2012, and indicates the fair value category assigned.

	Fair Value Measurements at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets/ Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
Money market funds(1)	$	15,660	$	—	$	—	$	15,660
Government-sponsored enterprise securities(2)		—		8,623		—		8,623
Commercial paper(2)		—		20,644		—		20,644
Corporate notes(1)(2)		—		47,340		—		47,340
Total	$	15,660	$	76,607	$	—	$	92,267
Liabilities
Derivatives(3)	$	—	$	—	$	51	$	51

(1)

Included in cash and cash equivalents on our consolidated balance sheet.

(2)

Included in current marketable securities on our consolidated balance sheet.

(3)

Included in fair value of derivatives on our consolidated balance sheet.

Changes in Level 3 Recurring Fair Value Measurements

        The table below includes a rollforward of the balance sheet amounts for the year ended December 31, 2012, including the change in fair value, for financial instruments in the Level 3 category. When a determination is made to classify a financial instrument within Level 3, the determination is based upon the significance of the unobservable parameters to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable components, observable components (that is, components that are actively quoted and can be validated to external sources). Accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the methodology.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Year Ended December 31, 2012
(In thousands)	Fair Value at December 31, 2011		Total Unrealized Gain Included in Earnings, net(1)			Purchases, Sales, Issuances, Settlements, net		Transfers In and/or Out of Level 3		Fair Value at December 31, 2012		Change in Unrealized Gain Related to Financial Instruments Held at December 31, 2012(1)
Derivative liabilities	$	64	$	(13	)	$	—	$	—	$	51	$	(13	)

(1)

Reported as unrealized gain on derivatives in our consolidated statements of operations.

Credit Risk

        We currently place our cash, restricted cash, cash equivalents and marketable securities with five financial institutions in the United States. Generally, these deposits may be redeemed upon demand and therefore, bear minimal risk. Deposits with banks may exceed the amount of insurance provided on such deposits. Financial instruments that potentially subject us to concentrations of credit risk consist primarily of marketable securities. Marketable securities currently consist of investment grade U.S. government-sponsored enterprise securities, commercial paper and corporate notes. Our investment policy, approved by the Audit Committee of our Board of Directors, limits the amount we may invest in any one type of investment issuer, thereby reducing credit risk concentrations.