FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2013

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

2. FAIR VALUE MEASUREMENTS

We categorize financial instruments recorded at fair value on our condensed 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 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 consolidated balance sheets, including the category for such financial 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 September 30, 2013 were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
	(In thousands)
Included in cash and cash equivalents:
Money market funds	$	5,997	$	—	$	—		$	5,997
Restricted cash:
Certificates of deposit	$	795	$	—	$	—		$	795
Marketable securities (due in less than 1 year):
Government-sponsored enterprise securities	$	7,319	$	1	$	—		$	7,320
Commercial paper	15,741		9		—			15,750
Corporate notes	33,569		—		(22		)	33,547
	$	56,629	$	10	$	(22	)	$	56,617

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			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 (due in less than 1 year):
Government-sponsored enterprise securities	$	8,618	$	5	$	—		$	8,623
Commercial paper	20,623		21		—			20,644
Corporate notes	44,190		22		(7		)	44,205
	$	73,431	$	48	$	(7	)	$	73,472

Marketable securities with unrealized losses at September 30, 2013 and December 31, 2012 were as follows:

	Less Than 12 Months					12 Months or Greater				Total
			Gross					Gross				Gross
	Estimated		Unrealized			Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses
	(In thousands)
As of September 30, 2013:
Corporate notes (due in less than 1 year)	$	31,654	$	(22	)	$	—	$	—	$	31,654	$	(22	)
As of December 31, 2012:
Corporate notes (due in less than 1 year)	$	27,045	$	(8	)	$	—	$	—	$	27,045	$	(8	)

The gross unrealized losses related to corporate notes as of September 30, 2013 and December 31, 2012 were due to changes in interest rates. We determined that the gross unrealized losses on our marketable securities as of September 30, 2013 and December 31, 2012 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.

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 condensed 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 during 2013.

As of September 30, 2013 and December 31, 2012, the following non-employee options to purchase common stock were considered derivatives and classified as current liabilities:

					At September 30, 2013			At December 31, 2012
					Number	Fair		Number	Fair
Issuance	Exercise		Exercisable	Expiration	of	Value		of	Value
Date	Price		Date	Date	Shares	(In thousands)		Shares	(In thousands)
March 2005	$	6.39	January 2007	March 2015	284,600	$	258	284,600	$	51

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

	September 30, 2013	December 31, 2012
Dividend yield	None	None
Expected volatility	0.955	0.828
Risk-free interest rate	0.33%	0.25%
Expected term	2 yrs	2 yrs

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 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 of the derivatives in effect on the reporting date. The expected term of derivatives is equal to the remaining contractual term of the instruments.

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 September 30, 2013 and indicates the fair value category assigned.

	Fair Value Measurements at Reporting Date Using
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets / Liabilities		Inputs		Inputs
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
Money market funds (1)	$	5,997	$	—	$	—	$	5,997
Government-sponsored enterprise securities (2)	—		7,320		—		7,320
Commercial paper (2)	—		15,750		—		15,750
Corporate notes (2)	—		33,547		—		33,547
Total	$	5,997	$	56,617	$	—	$	62,614
Liabilities
Derivatives (3)	$	—	$	—	$	258	$	258

(1) Included in cash and cash equivalents on our condensed consolidated balance sheets.

(2) Included in current marketable securities on our condensed consolidated balance sheets.

(3) Included in fair value of derivatives on our condensed consolidated balance sheets.

Changes in Level 3 Recurring Fair Value Measurements

The table below includes a rollforward of the balance sheet amounts for the three and nine months ended September 30, 2013, 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)

Three Months Ended September 30, 2013

Change in

Unrealized Loss

Total

Related to

Unrealized

Transfers

Financial

Fair Value at

Loss

Purchases

In and/or

Fair Value at

Instruments

June 30,

Included in

and

Sales and

Out of

September 30,

Held at

(In thousands)

2013

Earnings (1)

Issuances

Settlements

Level 3

2013

September 30, 2013 (1)

Derivative liabilities

$

50

$

208

$

—

$

—

$

—

$

258

$

208

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Nine Months Ended September 30, 2013

Change in

Unrealized Loss

Total

Related to

Unrealized

Transfers

Financial

Fair Value at

Loss

Purchases

In and/or

Fair Value at

Instruments

December 31,

Included in

and

Sales and

Out of

September 30,

Held at

(In thousands)

2012

Earnings (1)

Issuances

Settlements

Level 3

2013

September 30, 2013 (1)

Derivative liabilities

$

51

$

207

$

—

$

—

$

—

$

258

$

207

(1)   Reported as unrealized loss on derivatives in our condensed consolidated statements of operations.