8. Financial instruments

Fair value of financial instruments

The carrying amounts of certain of the Company’s financial instruments including cash, cash equivalents, accounts and other amounts receivable, prepayments, accounts payable, and accrued liabilities, approximate their fair values because of their nature and/or short maturities and are categorized as Level 1 in the fair value hierarchy. Short-term investments are categorized as Level 2 in the fair value hierarchy and as of March 31, 2014 had a fair value approximating their carrying amount.

The Company’s preferred stock embedded feature and warrants 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
BALANCES—January 1, 2014	$	221,320		$	800,206		$	1,021,526
Change in fair value of derivative liabilities		(113,723	)		—			(113,723	)
Derecognition of liabilities upon preferred stock conversion to common stock conversion		—			(800,206	)		(800,206	)

BALANCES—March 31, 2014	$	107,597		$	—		$	107,597

There were no transfers between Levels 1, 2, and 3 during the three months ended March 31, 2014 and 2013.