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 financial instruments measured at fair value on our 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. government-sponsored enterprise securities, commercial paper and corporate notes 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, 2014 were as follows:

(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Included in cash and cash equivalents:
Money market funds	$	40,342	$	—	$	—		$	40,342


Restricted cash:
Certificate of deposit	$	266	$	—	$	—		$	266


Marketable securities:
Government-sponsored enterprise securities (due in less than 1 year)	$	401	$	—	$	(1	)	$	400
Government-sponsored enterprise securities (due in 1 to 2 years)		6,556		—		(7	)		6,549
Commercial paper (due in less than 1 year)		10,985		14		—			10,999
Corporate notes (due in less than 1 year)		97,307		2		(63	)		97,246
Corporate notes (due in 1 to 2 years)		12,412		—		(29	)		12,383

	$	127,661	$	16	$	(100	)	$	127,577

Cash equivalents, restricted cash and marketable securities by security type at December 31, 2013 were as follows:

(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
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 December 31, 2014 and 2013 were as follows:

	Less Than 12 Months					12 Months or Greater				Total
(In thousands)	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
As of December 31, 2014:
Government-sponsored enterprise securities (due in less than 1 year)	$	400	$	(1	)	$	—	$	—	$	400	$	(1	)
Government-sponsored enterprise securities (due in 1 to 2 years)		5,549		(7	)		—		—		5,549		(7	)
Corporate notes (due in less than 1 year)		92,989		(63	)		—		—		92,989		(63	)
Corporate notes (due in 1 to 2 years)		12,383		(29	)		—		—		12,383		(29	)

	$	111,321	$	(100	)	$	—	$	—	$	111,321	$	(100	)


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 government-sponsored enterprise securities and corporate notes as of December 31, 2014 and 2013 were due to changes in interest rates. We determined that the gross unrealized losses on our marketable securities as of December 31, 2014 and 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 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 consolidated balance sheets. These options are marked to fair value at each reporting period, and upon the exercise of these options, the instruments are marked to fair value and reclassified from derivative liabilities to stockholders' equity. We have not recorded any reclassifications from current liabilities to stockholders' equity for non-employee option exercises in 2014 and 2013.

As of December 31, 2014 and 2013, 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		Number of Shares at December 31,				Exercisable Date	Expiration Date	Fair Value at December 31,
Issuance Date	Exercise Price		2014		2013		Exercisable Date	Expiration Date	2014		2013
									(In thousands)
March 2005	$	6.39		284,600		284,600	January 2007	March 2015	$	16	$	367

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,
	2014	2013
Dividend yield	0%	0%
Expected volatility	0.895	0.844
Risk-free interest rate	0.04%	0.13%
Expected term	0.25 yr	1 yr

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 common 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 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 December 31, 2014 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)	$	40,342	$	—	$	—	$	40,342
Government-sponsored enterprise securities(2)(3)		—		6,949		—		6,949
Commercial paper(2)		—		10,999		—		10,999
Corporate notes(2)(3)		—		109,629		—		109,629

Total	$	40,342	$	127,577	$	—	$	167,919


Liabilities
Derivatives(4)	$	—	$	—	$	16	$	16

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 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)	$	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 consolidated balance sheets.
(2)	Included in current portion of marketable securities on our consolidated balance sheets.
(3)	Included in noncurrent portion of marketable securities on our consolidated balance sheets.
(4)	Included in fair value of derivatives on our consolidated balance sheets.

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, 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 gain in the table below includes 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, 2014
(In thousands)	Fair Value at December 31, 2013		Total Unrealized Gain Included in Earnings(1)			Purchases, Sales, Issuances, Settlements		Transfers In and/or Out of Level 3		Fair Value at December 31, 2014		Change in Unrealized Gain Related to Financial Instruments Held at December 31, 2014(1)
Derivative liabilities	$	367	$	(351	)	$	—	$	—	$	16	$	(351	)

(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 four 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 cash equivalents and marketable securities. Cash equivalents and marketable securities currently consist of money market funds, 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.