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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2020
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Note 7. Fair Value Measurements We review the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There were no transfers between Level 1, Level 2, or Level 3 during the nine months ended September 30, 2020 and 2019. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis (in thousands):
|  | Fair Value as of September 30, 2020 |  | Fair Value Measurements Using Inputs Considered as:
|  |  | Level 1 |  | Level 2 |  | Level 3
Assets: |  |  |  |  |  |  |  |
Derivative assets - designated as cash flow hedges (foreign currency exchange rate “FX”) |  | $ | 1,787 |  |  | $ | — |  |  | $ | 1,787 |  |  | $ | — |
Derivative assets - freestanding instruments (FX) |  | 4,052 |  |  | — |  |  | 4,052 |  |  | — |
Derivative assets - capped call derivatives |  | 38,999 |  |  | — |  |  | — |  |  | 38,999 |
Convertible notes receivable |  | 2,301 |  |  | — |  |  | — |  |  | 2,301 |
|  | $ | 47,139 |  |  | $ | — |  |  | $ | 5,839 |  |  | $ | 41,300 |
Liabilities: |  |  |  |  |  |  |  |
Derivative liabilities - freestanding instruments (interest rate swaps) |  | $ | 139 |  |  | $ | — |  |  | $ | 139 |  |  | $ | — |
Derivative liabilities - freestanding instruments (FX) |  | 85 |  |  | — |  |  | 85 |  |  | — |
Derivative liabilities - embedded exchange feature |  | 59,398 |  |  | — |  |  | — |  |  | 59,398 |
Derivative liabilities - other |  | 1,350 |  |  | — |  |  | — |  |  | 1,350 |
Contingent consideration arrangements |  | 96,174 |  |  | — |  |  | — |  |  | 96,174 |
|  | $ | 157,146 |  |  | $ | — |  |  | $ | 224 |  |  | $ | 156,922 |
|  | Fair Value as of December 31, 2019 |  | Fair Value Measurements Using Inputs Considered as:
|  |  | Level 1 |  | Level 2 |  | Level 3
Assets: |  |  |  |  |  |  |  |
Derivative assets - designated as cash flow hedges (FX) |  | $ | 535 |  |  | $ | — |  |  | $ | 535 |  |  | $ | — |
Derivative assets - freestanding instruments (FX) |  | 26 |  |  | — |  |  | 26 |  |  | — |
|  | $ | 561 |  |  | $ | — |  |  | $ | 561 |  |  | $ | — |
Liabilities: |  |  |  |  |  |  |  |
Derivative liabilities - designated as cash flow hedges (FX) |  | $ | 169 |  |  | $ | — |  |  | $ | 169 |  |  | $ | — |
Derivative liabilities - designated as cash flow hedges (interest rate swaps) |  | 374 |  |  | — |  |  | 374 |  |  | — |
Derivative liabilities - freestanding instruments (FX) |  | 3,137 |  |  | — |  |  | 3,137 |  |  | — |
Contingent consideration arrangements |  | 137,349 |  |  | — |  |  | — |  |  | 137,349 |
|  | $ | 141,029 |  |  | $ | — |  |  | $ | 3,680 |  |  | $ | 137,349 |
The following table provides a reconciliation of the beginning and ending balances of our recurring fair value measurements, using significant unobservable inputs (Level 3) (in thousands):
|  | Capped Call Derivative Asset |  | Embedded Exchange Feature Derivative Liability |  | Other Derivative Liabilities |  | Contingent Consideration Liability Arrangements |  | Convertible Notes Receivable
As of December 31, 2019 |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 137,349 |  |  | $ | — |
Additions |  | 43,096 |  |  | 74,951 |  |  | — |  |  | — |  |  | 2,267 |
Payments (1) |  | — |  |  | — |  |  | — |  |  | (9,868) |  |  | — |
Changes in fair value (2) (3) (4) |  | (4,097) |  |  | (15,553) |  |  | 1,350 |  |  | (31,176) |  |  | 34 |
Effect of changes in foreign currency exchange rates |  | — |  |  | — |  |  | — |  |  | (131) |  |  | — |
Total at September 30, 2020 |  | 38,999 |  |  | 59,398 |  |  | 1,350 |  |  | 96,174 |  |  | 2,301 |
Less current portion at September 30, 2020 |  | — |  |  | — |  |  | 1,160 |  |  | 16,571 |  |  | 2,044 |
Long-term portion at September 30, 2020 |  | $ | 38,999 |  |  | $ | 59,398 |  |  | $ | 190 |  |  | $ | 79,603 |  |  | $ | 257 |
(1)During the nine months ended September 30, 2020, we paid $8.8 million under the contingent consideration arrangement for the acquisition of CardiacAssist, Inc., doing business as TandemLife (“TandemLife”). Additionally, we made final payments under contingent consideration arrangements resulting from the acquisitions of two distributors. (2)The contingent consideration change in fair value during the nine months ended September 30, 2020 is primarily due to a one-year delay in the projected achievement of a certain regulatory milestone and timing of sales-based earnout payments for ImThera Medical Inc. (“ImThera”), and the impact of an increase in discount rates utilized in the valuation of contingent consideration. Refer to the tables below for further information regarding the fair value measurements of contingent consideration. (3)During the nine months ended September 30, 2020, the contingent consideration change in fair value resulted in a decrease of $19.2 million and $12.0 million recorded to cost of sales - exclusive of amortization and research and development, respectively. (4)Changes in the fair value of the embedded exchange feature derivative and capped call derivatives are recognized in foreign exchange and other gains (losses) in the condensed consolidated statements of income (loss). Embedded Exchange Feature and Capped Call Derivatives In June 2020, the Company issued $287.5 million in cash exchangeable senior notes and entered into related capped call transactions. The cash exchangeable senior notes include an embedded exchange feature that is bifurcated from the cash exchangeable senior notes. Please refer to “Note 8. Financing Arrangements” for further details. The embedded exchange feature derivative is measured at fair value using a binomial lattice model and discounted cash flows that utilize observable and unobservable market data. The capped call derivative is measured at fair value using the Black-Scholes model utilizing observable and unobservable market data, including stock price, remaining contractual term, expected volatility, risk-free interest rate and expected dividend yield, as applicable. The embedded exchange feature and capped call derivatives are classified as Level 3 as the Company uses historical volatility and implied volatility from options traded to determine expected stock price volatility which is an unobservable input that is significant to the valuation. In general, an increase in our stock price or stock price volatility would increase the fair value of the embedded exchange feature and capped call derivatives which would result in an increase in expense. As time to the expiration of the derivatives decreases with passage of time, the fair value of the derivatives would decrease. The future impact on net income depends on how significant inputs such as stock price, stock price volatility and time to the expiration of the derivatives change in relation to other inputs. The stock price volatility as of September 30, 2020 was 37%. As of September 30, 2020, a 10% lower volatility, holding other inputs constant, would result in approximate fair value for the embedded exchange feature derivative of $42.4 million and a 10% higher volatility, holding other inputs constant, would result in approximate fair value of $76.4 million. As of September 30, 2020, a 10% lower volatility, holding other inputs constant would result in approximate fair value for the capped call derivatives of $29.3 million and a 10% higher volatility, holding other inputs constant, would result in approximate fair value of $42.3 million. Contingent Consideration Arrangements The following table provides the fair value of our Level 3 contingent consideration arrangements by acquisition (in thousands):
|  | September 30, 2020 |  | December 31, 2019
ImThera |  | $ | 79,603 |  |  | $ | 113,503 |
TandemLife |  | 11,672 |  |  | 17,311 |
Miami Instruments |  | 4,899 |  |  | 5,338 |
Drilltex |  | — |  |  | 294 |
Other |  | — |  |  | 903 |
|  | $ | 96,174 |  |  | $ | 137,349 |
The ImThera business combination involved contingent consideration arrangements composed of potential cash payments upon the achievement of a certain regulatory milestone and a sales-based earnout associated with sales of products. The sales-based earnout is valued using projected sales from our internal strategic plan. Both arrangements are Level 3 fair value measurements and include the following significant unobservable inputs as of September 30, 2020:
ImThera Acquisition |  | Valuation Technique |  | Unobservable Input |  | Ranges
Regulatory milestone-based payment |  | Discounted cash flow |  | Discount rate |  | 8.3%
|  |  |  | Probability of payment |  | 85%
|  |  |  | Projected payment year |  | 2024
Sales-based earnout |  | Monte Carlo simulation |  | Risk-adjusted discount rate |  | 12.2 | % | - | 12.5%
|  |  |  | Credit risk discount rate |  | 8.5 | % | - | 9.2%
|  |  |  | Revenue volatility |  | 32.5%
|  |  |  | Probability of payment |  | 85%
|  |  |  | Projected years of earnout |  | 2025 | - | 2028
The TandemLife business combination involved a contingent consideration arrangement composed of potential cash payments upon the achievement of certain regulatory milestones. The arrangement is a Level 3 fair value measurement and includes the following significant unobservable inputs as of September 30, 2020:
TandemLife Acquisition |  | Valuation Technique |  | Unobservable Input |  | Ranges
Regulatory milestone-based payment |  | Discounted cash flow |  | Discount rate |  | 7.6 | % | - | 7.7%
|  |  |  | Probability of payments |  | 70 | % | - | 100%
|  |  |  | Projected payment years |  | 2020 | - | 2021
The Miami Instruments business combination involved a contingent consideration arrangement composed of potential cash payments upon the achievement of certain regulatory milestones. The arrangement is a Level 3 fair value measurement and includes the following significant unobservable inputs as of September 30, 2020:
Miami Instruments |  | Valuation Technique |  | Unobservable Input |  | Ranges
Regulatory milestone-based payments |  | Discounted cash flow |  | Discount rate |  | 7.6 | % | - | 7.7%
|  |  |  | Probability of payments |  | 80 | % | - | 95%
|  |  |  | Projected payment years |  | 2020 | - | 2021

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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