2. FAIR VALUE MEASUREMENTS

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.

Cash Equivalents and Marketable Securities

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 June 30, 2014 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	$	5,807	$	—	$	—		$	5,807
Commercial paper	1,500		—		—			1,500
	$	7,307	$	—	$	—		$	7,307
Restricted cash:
Certificates of deposit	$	795	$	—	$	—		$	795
Marketable securities:
Government-sponsored enterprise securities (due in less than 1 year)	$	4,192	$	—	$	—		$	4,192
Government-sponsored enterprise securities (due in 1 to 2 years)	401		—		—			401
Commercial paper (due in less than 1 year)	12,486		12		—			12,498
Corporate notes (due in less than 1 year)	114,157		5		(36		)	114,126
Corporate notes (due in 1 to 2 years)	6,096		—		(1		)	6,095
	$	137,332	$	17	$	(37	)	$	137,312

Cash equivalents, restricted cash and marketable securities by security type at December 31, 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	$	8,079	$	—	$	—		$	8,079
Corporate notes	2,206		—		—			2,206
	$	10,285	$	—	$	—		$	10,285
Restricted cash:
Certificates of deposit	$	795	$	—	$	—		$	795
Marketable securities:
Government-sponsored enterprise securities (due in less than 1 year)	$	7,369	$	1	$	(1	)	$	7,369
Commercial paper (due in less than 1 year)	5,496		3		—			5,499
Corporate notes (due in less than 1 year)	39,383		1		(18		)	39,366
	$	52,248	$	5	$	(19	)	$	52,234

Marketable securities with unrealized losses at June 30, 2014 and December 31, 2013 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 June 30, 2014:
Corporate notes (due in less than 1 year)	$	86,550	$	(36	)	$	—	$	—	$	86,550	$	(36	)
Corporate notes (due in 1 to 2 years)	6,095		(1		)	—		—		6,095		(1		)
	$	92,645	$	(37	)	$	—	$	—	$	92,645	$	(37	)

As of December 31, 2013:
Government-sponsored enterprise securities (due in less than 1 year)	$	3,947	$	(1	)	$	—	$	—	$	3,947	$	(1	)
Corporate notes (due in less than 1 year)	37,060		(18		)	—		—		37,060		(18		)
	$	41,007	$	(19	)	$	—	$	—	$	41,007	$	(19	)

The gross unrealized losses related to corporate notes and government-sponsored enterprise securities as of June 30, 2014 and December 31, 2013 were due to changes in interest rates. We determined that the gross unrealized losses on our marketable securities as of June 30, 2014 and December 31, 2013 were temporary in nature. We review our investments quarterly to identify and evaluate whether any investments have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which the fair value has been less than the amortized cost basis and whether we intend to sell the security or whether it is more likely than not that we would be required to sell the security before recovery of the amortized cost basis. We currently do not intend to sell these securities before recovery of their amortized cost basis.

Derivatives

Non-employee options are normally traded less actively, have trade activity that is one way, and/or are 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 balance sheets. Upon the exercise of these options, the instruments are marked to fair value and reclassified from derivative liabilities to stockholders’ equity. We have not reclassified any derivative liabilities to stockholders’ equity for any non-employee option exercises during the six months ended June 30, 2014.

As of June 30, 2014 and December 31, 2013, the following non-employee options to purchase common stock were considered derivatives and classified as current liabilities:

At June 30, 2014

At December 31, 2013

Issuance

Exercise

Exercisable

Expiration

Number

Fair Value

Number

Fair Value

Date

Price

Date

of Shares

(In thousands)

of Shares

(In thousands)

March 2005

6.39

January 2007

March 2015

284,600

290

284,600

367

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

	June 30, 2014	December 31, 2013
Dividend yield	0%	0%
Expected volatility	1.520	0.844
Risk-free interest rate	0.11%	0.13%
Expected term	0.75 yr	1 yr

Dividend yield is based on historical cash dividend payments. The expected volatility is based on historical volatilities of our stock since 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 June 30, 2014 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)	$	5,807	$	—	$	—	$	5,807
Government-sponsored enterprise securities (2)(3)	—		4,593		—		4,593
Commercial paper (1)(2)	—		13,998		—		13,998
Corporate notes (2)(3)	—		120,221		—		120,221
Total	$	5,807	$	138,812	$	—	$	144,619

Liabilities
Derivatives (4)	$	—	$	—	$	290	$	290

The following table presents information about our financial instruments that are measured at fair value on a recurring basis as of December 31, 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)	$	8,079	$	—	$	—	$	8,079
Government-sponsored enterprise securities (2)	—		7,369		—		7,369
Commercial paper (2)	—		5,499		—		5,499
Corporate notes (1)(2)	—		41,572		—		41,572
Total	$	8,079	$	54,440	$	—	$	62,519

Liabilities
Derivatives (4)	$	—	$	—	$	367	$	367

(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 fair value of derivatives on our condensed 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 six months ended June 30, 2014, 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 June 30, 2014

Change in

Unrealized Loss

Total

Related to

Unrealized

Transfers

Financial

Fair Value at

Loss

Purchases

In and/or

Fair Value at

Instruments

March 31,

Included in

and

Sales and

Out of

June 30,

Held at

(In thousands)

2014

Earnings (1)

Issuances

Settlements

Level 3

2014

June 30, 2014 (1)

Derivative liabilities

143

147

—

290

147

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Six Months Ended June 30, 2014

Change in

Unrealized Gain

Total

Related to

Unrealized

Transfers

Financial

Fair Value at

Gain

Purchases

In and/or

Fair Value at

Instruments

December 31,

Included in

and

Sales and

Out of

June 30,

Held at

(In thousands)

2013

Earnings (1)

Issuances

Settlements

Level 3

2014

June 30, 2014 (1)

Derivative liabilities

367

(77

)

—

290

(77

)

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