8. Financial instruments

Fair value of financial instruments

The Company holds short and long term available-for-sale securities that are measured at fair value which is determined on a recurring basis according to a fair value hierarchy that prioritizes the inputs and assumptions used, and the valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:

Level 1:

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2:

Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level 3:

Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The determination of a financial instrument’s level within the fair value hierarchy is based on an assessment of the lowest level of any input that is significant to the fair value measurement. The Company considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

The carrying amounts of certain of the Company’s financial instruments including cash, cash equivalents, accounts and other amounts receivable, accounts payable, and accrued liabilities, approximate their fair values because of their nature and/or short maturities.

The following tables present the fair value of our financial instruments that are measured at fair value on a recurring basis:


	QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UN- OBSERVABLE INPUTS (LEVEL 3)			TOTAL
BALANCES – June 30, 2014
Short-term investments – U.S. government agency securities	$	17,989,220	$	—	$	—		$	17,989,220
Investments – bank term deposits		—		46,835		—			46,835
Investments – U.S. treasury securities		16,440,338		—		—			16,440,338
Bank loan warrant derivative liabilities		—		—		(93,096	)		(93,096	)

	$	34,429,558	$	46,835	$	(93,096	)	$	34,383,297

BALANCES – December 31, 2013
Short-term investments – bank term deposits	$	—	$	2,820,600	$	—		$	2,820,600
Bank loan warrant derivative liabilities		—		—		(221,320	)		(221,320	)
Redemption option on preferred stock		—		—		(800,206	)		(800,206	)

		—	$	2,820,600	$	(1,021,526	)	$	1,799,074

Level 1 investments, which include investments that are valued based on quoted market prices in active markets, consisted of U.S. Treasury and U.S. government agency securities.

Level 2 investments, which include investments for which all significant inputs are observable, consisted of bank term deposits.

Level 3 investments consisted of the Company’s preferred stock embedded feature and warrants which are accounted for as derivative liabilities. The Company used Level 3 inputs for the valuation methodology of the derivative liabilities. The estimated fair values were computed using a Black-Scholes option pricing model which incorporates a number of assumptions and judgments to estimate the fair value of these derivative liabilities including the fair value per share of the underlying stock, remaining contractual term of the warrants and redeemable convertible preferred stock, risk-free interest rate, expected dividend yield, credit spread, and expected volatility of the underlying stock. The derivative liabilities are adjusted to reflect estimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded in change in fair value of derivative liabilities:

Fair value of significant unobservable inputs (Level 3):


	BANK LOAN WARRANT DERIVATIVE LIABILITIES			PREFERRED STOCK EMBEDDED DERIVATIVE LIABILITIES		TOTAL
Three months ended June 30, 2014:
BALANCES - March 31, 2014	$	107,597		$	—	$	107,597
Change in fair value of derivative liabilities		(14,501	)		—		(14,501	)

BALANCES – June 30, 2014	$	93,096		$	—	$	93,096


	BANK LOAN WARRANT DERIVATIVE LIABILITIES			PREFERRED STOCK EMBEDDED DERIVATIVE LIABILITIES			TOTAL
Six months ended June 30, 2014:
BALANCES - January 1, 2014	$	221,320		$	800,206		$	1,021,526
Change in fair value of derivative liabilities		(128,224	)		—			(128,224	)
Derecognition of liabilities upon preferred stock conversion to common stock conversion		—			(800,206	)		(800,206	)

BALANCES – June 30, 2014	$	93,096		$	—		$	93,096

There were no transfers between Levels 1, 2, and 3 during the three and six months ended June 30, 2014.

At June 30, 2014, the Company has short term investments consisting of available for sale securities of $17,989,220 and non-current investments consisting of available for sale securities of $16,487,173. The net unrealized gain as of June 30, 2014 was $880 with the period of unrealized gain/losses being under 12 months.