8. Financial instruments

Fair value of financial instruments

The fair value of the Company’s financial instruments are determined 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 Company holds short and long-term investments that are classified as available-for-sale securities, which are measured at fair value determined on a recurring basis according to the fair value hierarchy.

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 – September 30, 2014
Short-term investments – U.S. treasury securities	$	6,138,001	$	—	$	—		$	6,138,001
Short-term investments – U.S. government agency securities		17,996,540		—		—			17,996,540
Investments – bank term deposits		—		44,610		—			44,610
Investments – U.S. treasury securities		6,094,143		—		—			6,094,143
Investments – U.S. government agency securities		2,001,299		—		—			2,001,299
Bank loan warrant derivative liabilities		—		—		(63,708	)		(63,708	)

	$	32,229,983	$	44,610	$	(63,708	)	$	32,210,885

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

Level 3 instruments 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 September 30, 2014:
BALANCES - June 30, 2014	$	93,096		$	—	$	93,096
Change in fair value of derivative liabilities		(29,388	)		—		(29,388	)

BALANCES – September 30, 2014	$	63,708		$	—	$	63,708


	BANK LOAN WARRANT DERIVATIVE LIABILITIES			PREFERRED STOCK EMBEDDED DERIVATIVE LIABILITIES			TOTAL
Nine months ended September 30, 2014:
BALANCES - January 1, 2014	$	221,320		$	800,206		$	1,021,526
Change in fair value of derivative liabilities		(157,612	)		—			(157,612	)
Derecognition of liabilities upon preferred stock conversion to common stock conversion		—			(800,206	)		(800,206	)

BALANCES – September 30, 2014	$	63,708		$	—		$	63,708

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

At September 30, 2014, the Company had short-term investments consisting of available for sale securities of $24,134,541 and non-current investments consisting of available for sale securities of $8,140,052. Total gains for securities with net gains were $7,301 and total losses for securities with net losses were zero as of September 30, 2014. The Company’s non-current investments had contractual maturities of less than 24 months.