Microbot Medical Inc. Fair Value Disclosure

Note 3. Fair Value Measurement

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, we are required to apply a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value. The three levels of the fair value hierarchy are:

Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 — Directly or indirectly observable inputs other than in Level 1, that include quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active.

 

Level 3 — Unobservable inputs which are supported by little or no market activity that reflects the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets measured at fair value as of December 31, 2015 and 2014 are classified below based on the three fair value hierarchy tiers described above.

Our cash equivalents are classified as Level 1 because they are valued primarily using quoted market prices.

We estimated the fair value of our loan payable using the net present value of the payments discounted at an effective interest rate. We believe the estimates used to measure the fair value of our loan payable constitute Level 3 inputs.

Our liability for warrants issued in our 2011 financing is classified as Level 3 as the liability is valued using a Monte Carlo simulation model. Some of the significant inputs used to calculate the fair value of warrant liability include our stock price on the valuation date, expected volatility of our common stock as traded on NASDAQ, and risk-free interest rates that are derived from the yield on U.S. Treasury debt securities, all of which are observable from active markets. However, the use of a Monte Carlo simulation model requires the input of additional subjective assumptions including management’s assumptions regarding the likelihood of a re-pricing of these warrants pursuant to anti-dilution provisions and the progress of our R&D programs and its affect on potential future financings.

The following table presents our financial assets and liabilities measured at fair value as of December 31, 2015:

 

		Fair Value Measurement at Reporting Date Using
		Quoted Prices in Active Markets for Identical Assets (Level 1)				Unobservable Inputs (Level 3)				As of December 31, 2015
Financial assets
Cash equivalents:
Money market funds		$	2,544,475			$	—			$	2,544,475
U.S. Treasury debt obligations			11,158,400				—				11,158,400
Total financial assets		$	13,702,875			$	—			$	13,702,875
Financial liabilities
Loan payable net of discounts		$	—			$	10,334,029			$	10,334,029
Warrant liabilities			—				770,964				770,964
Total financial liabilities		$	—			$	11,104,993			$	11,104,993

Level 3 Reconciliation

The following table presents a roll forward for liabilities measured at fair value using significant unobservable inputs (Level 3) for 2015.

 

		Warrant Liabilities
Balance at December 31, 2014		$	1,684,551
Add change in fair value of warrants			(913,587	)
Balance at December 31, 2015		$	770,964

 

		Loan Payable
Balance at December 31, 2014		$	15,020,417
Less repayments of principal			(4,778,485	)
Add accretion of discount			92,097
Balance at December 31, 2015		$	10,334,029
Current portion		$	1,417,388
Non-current portion			8,916,641
Balance at December 31, 2015		$	10,334,029