FAIR VALUE MEASUREMENTS
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Mar. 31, 2014
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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:
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:
Cash equivalents, restricted cash and marketable securities by security type at December 31, 2013 were as follows:
Marketable securities with unrealized losses at March 31, 2014 and December 31, 2013 were as follows:
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:
The fair value of derivatives has been calculated at each reporting date using the Black Scholes option-pricing model with the following assumptions:
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.
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.
(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.
(1) Reported as unrealized gain on derivatives in our condensed statements of operations. |