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FAIR VALUE MEASUREMENTS
3 Months Ended
Mar. 31, 2014
FAIR VALUE MEASUREMENTS  
FAIR VALUE MEASUREMENTS

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 March 31, 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

 

$

4,247

 

$

 

$

 

$

4,247

 

Corporate notes

 

4,587

 

 

 

4,587

 

 

 

$

8,834

 

$

 

$

 

$

8,834

 

Restricted cash:

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

795

 

$

 

$

 

$

795

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Government-sponsored enterprise securities (due in less than 1 year)

 

$

6,328

 

$

 

$

 

$

6,328

 

Commercial paper (due in less than 1 year)

 

9,488

 

10

 

 

9,498

 

Corporate notes (due in less than 1 year)

 

118,130

 

2

 

(89

)

118,043

 

Corporate notes (due in 1 to 2 years)

 

7,477

 

 

(13

)

7,464

 

 

 

$

141,423

 

$

12

 

$

(102

)

$

141,333

 

 

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 March 31, 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 March 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes (due in less than 1 year)

 

$

112,706

 

$

(89

)

$

 

$

 

$

112,706

 

$

(89

)

Corporate notes (due in 1 to 2 years)

 

7,464

 

(13

)

 

 

7,464

 

(13

)

 

 

$

120,170

 

$

(102

)

$

 

$

 

$

120,170

 

$

(102

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 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 March 31, 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 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 three months ended March 31, 2014.

 

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

 

 

 

 

 

 

 

 

 

At March 31, 2014

 

At December 31, 2013

 

Issuance

 

Exercise

 

Exercisable

 

Expiration

 

Number

 

Fair Value

 

Number

 

Fair Value

 

Date

 

Price

 

Date

 

Date

 

of Shares

 

(In thousands)

 

of Shares

 

(In thousands)

 

March 2005

 

$

6.39

 

January 2007

 

March 2015

 

284,600

 

$

143

 

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:

 

 

 

March 31, 2014

 

December 31, 2013

 

Dividend yield

 

0%

 

0%

 

Expected volatility

 

1.361

 

0.844

 

Risk-free interest rate

 

0.13%

 

0.13%

 

Expected term

 

1 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 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 March 31, 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) 

 

$

4,247

 

$

 

$

 

$

4,247

 

Government-sponsored enterprise securities (2) 

 

 

6,328

 

 

6,328

 

Commercial paper (2) 

 

 

9,498

 

 

9,498

 

Corporate notes (1)(2)(3) 

 

 

130,094

 

 

130,094

 

Total

 

$

4,247

 

$

145,920

 

$

 

$

150,167

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivatives (4) 

 

$

 

$

 

$

143

 

$

143

 

 

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 marketable securities on our condensed balance sheets.

 

(3)         Included in noncurrent 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 months ended March 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 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 March 31, 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

 

March 31,

 

Held at

 

(In thousands)

 

2013

 

Earnings (1)

 

Issuances

 

Settlements

 

Level 3

 

2014

 

March 31, 2014 (1)

 

Derivative liabilities

 

$

367

 

$

(224

)

$

 

$

 

$

 

$

143

 

$

(224

)

 

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