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Fair value measurements | 12 Months Ended
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Dec. 31, 2018
Fair Value Disclosures [Abstract] |
Fair value measurements |
11. | Fair value measurements
Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Non-financial assets and liabilities of the Company measured at fair value include any long-lived assets that are impaired in a currently reported period or equity securities measured at observable prices in orderly transactions. The authoritative guidance also describes three levels of inputs that may be used to measure fair value:
Level 1: | quoted prices in active markets for identical assets and liabilities
Level 2: | observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3: | unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions
The Company’s financial instruments include cash equivalents, restricted cash, collective trust funds, treasury securities, trade accounts receivable, accounts payable, long-term secured debt, equity warrants, equity securities, available for sale debt securities, contingent consideration and deferred compensation plan liabilities. The carrying value of cash equivalents, restricted cash, trade accounts receivable and accounts payable approximate fair value due to the short-term maturities of these instruments. The Company’s credit facilities carry a floating rate of interest, and therefore, the carrying value of long-term debt is considered to approximate the fair value. The Company’s collective trust funds, treasury securities, equity warrants, equity securities, debt security, contingent consideration, and deferred compensation plan liabilities are the only financial instruments recorded at fair value on a recurring basis as follows:
(U.S. Dollars, in thousands) |  | Balance December 31, 2018 |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Treasury securities |  | $ | 490 |  |  | $ | 490 |  |  | $ | — |  |  | $ | — |
Equity warrants |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Equity securities |  |  | 219 |  |  |  | — |  |  |  | 219 |  |  |  | — |
Debt security |  |  | 17,820 |  |  |  | — |  |  |  | — |  |  |  | 17,820 |
Total |  | $ | 18,529 |  |  | $ | 490 |  |  | $ | 219 |  |  | $ | 17,820 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | (28,560 | ) |  | $ | — |  |  | $ | — |  |  | $ | (28,560 | )
Deferred compensation plan |  |  | (1,275 | ) |  |  | — |  |  |  | (1,275 | ) |  |  | — |
Total |  | $ | (29,835 | ) |  | $ | — |  |  | $ | (1,275 | ) |  | $ | (28,560 | )
(U.S. Dollars, in thousands) |  | Balance December 31, 2017 |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collective trust funds |  | $ | 100 |  |  | $ | — |  |  | $ | 100 |  |  | $ | — |
Treasury securities |  |  | 556 |  |  |  | 556 |  |  |  | — |  |  |  | — |
Debt security |  |  | 16,050 |  |  |  | — |  |  |  | — |  |  |  | 16,050 |
Total |  | $ | 16,706 |  |  | $ | 556 |  |  | $ | 100 |  |  | $ | 16,050 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deferred compensation plan |  | $ | (1,379 | ) |  | $ | — |  |  | $ | (1,379 | ) |  | $ | — |
Total |  | $ | (1,379 | ) |  | $ | — |  |  | $ | (1,379 | ) |  | $ | — |
The fair value of treasury securities are determined based on quoted prices in active markets for identical assets, therefore, the Company has categorized these instruments as Level 1 financial instruments. The fair value of the Company’s collective trust funds, equity warrants, equity securities, and deferred compensation plan liabilities are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets; therefore, the Company has categorized these instruments as Level 2 financial instruments. Equity Warrants and Securities The Company holds investments in common stock and warrants to purchase shares of common stock of Bone Biologics. The Company’s common stock investments are recorded within other long-term assets while the warrants’ value was reduced to zero in 2018. Prior to this reduction in value, the warrants were recorded within other current assets or other long-term assets, dependent upon the expiration date. Prior to 2018, these instruments were accounted for at cost as the fair value of these instruments was not readily determinable. Effective January 1, 2018, the Company is required to measure these equity investments at fair value and recognize any changes in fair value in net income as a result of adopting ASU 2016-01. However, for certain equity investments that do not have readily determinable fair values, the new guidance allows entities to choose to measure these investments using a new measurement alternative, which values the investments at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. The changes in valuation of these securities for the years ended December 31, 2018 and 2017 are shown below:
(U.S. Dollars, in thousands) |  | 2018 |  |  | 2017 |  |  | 2016 |
Equity securities and warrants at January 1 |  | $ | 2,768 |  |  | $ | 2,768 |  |  | $ | 2,768 |
Impact of adoption of ASU 2016-01 recognized in other income |  |  | 1,629 |  |  |  | — |  |  |  | — |
Purchase of additional common stock |  |  | 500 |  |  |  | — |  |  |  | — |
Fair value adjustments, expirations, and impairments recognized in other expense |  |  | (4,678 | ) |  |  | — |  |  |  | — |
Equity securities and warrants at December 31 |  | $ | 219 |  |  | $ | 2,768 |  |  | $ | 2,768 |
Debt Security The Company holds a debt security of eNeura, Inc., a privately held medical technology company that is developing devices for the treatment of migraines. The debt security matures on March 4, 2019. The fair value of the debt security, including accrued interest, is based upon significant unobservable inputs, including the use of a discounted cash flows model, requiring the Company to develop its own assumptions; therefore, the Company has categorized this asset as a Level 3 financial asset. Some of the more significant unobservable inputs used in the fair value measurement of the debt security are the estimated likelihood of conversion to equity and the discount rate. Holding other inputs constant, changes in these assumptions could result in a significant change in the fair value of the debt security. As of December 31, 2018, the Company reassessed its estimate of fair value based on current financial information and other assumptions, resulting in a fair value of $17.8 million, a net increase of $1.8 million during 2018, which the Company recorded in other comprehensive income as an unrealized gain on debt securities. This compares to an amortized cost basis of $9.0 million. The Company evaluates any declines in fair value, if any, each quarter to determine if impairments are other-than-temporary. Based upon the Company’s best estimate of the amount it expected to recover at the time, the Company recorded an other-than-temporary impairments of $5.6 million in 2017 and $2.7 million in 2016. These other-than-temporary impairments were reclassified from accumulated other comprehensive loss and included within other expense, net. The following table provides a reconciliation of the beginning and ending balances for debt securities measured at fair value using significant unobservable inputs (Level 3):
(U.S. Dollars, in thousands) |  | 2018 |  |  | 2017 |
Balance at January 1 |  | $ | 16,050 |  |  | $ | 12,220 |
Accrued interest income |  |  | — |  |  |  | — |
Gains (losses) recorded for the period |  |  |  |  |  |  |  |
Recognized in net income |  |  | — |  |  |  | (5,585 | )
Recognized in other comprehensive income |  |  | 1,770 |  |  |  | 9,415 |
Balance at December 31 |  | $ | 17,820 |  |  | $ | 16,050 |
Currently, the Company does not expect to collect the complete principal and interest on March 4, 2019 and is in negotiations with eNeura to possibly extend and/or modify other terms of the eNeura Note. Any significant changes to the term of the eNeura Note, including extending the due date, could have a material impact on the fair value of the security. Contingent Consideration The contingent consideration consists of potential future milestone payments of up to $60.0 million in cash associated with the Spinal Kinetics acquisition. The milestone payments include (i) up to $15.0 million if the FDA grants approval of Spinal Kinetics’ M6-C artificial cervical disc (the “FDA Milestone”) and (ii) revenue-based milestone payments of up to $45.0 million in connection with future sales of the M6-C artificial cervical disc and the M6-L artificial lumbar disc. Milestones must be achieved within five years of April 30, 2018 to trigger applicable payments. Approximately $13.6 million of this liability is included within other current liabilities and $15.0 million is included within other long-term liabilities. The Company estimated the fair value of the contingent consideration attributable to the FDA Milestone using a probability-weighted discounted cash flow model. This fair value is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The key assumptions in applying the probability-weighted discounted cash flow model include the Company’s estimation of the probability and timing of obtaining FDA approval for the M6-C artificial cervical disc. The Company’s expectation as of December 31, 2018, was to obtain approval from the FDA mid-2019. Significant changes in these assumptions could result in a significantly higher or lower fair value. The Company estimated the fair value of the potential future revenue-based milestone payments using a Monte Carlo simulation. This fair value measurement is based on significant inputs that are unobservable in the market, and thus represents a Level 3 measurement. The key assumptions in applying the Monte Carlo valuation model include the Company’s forecasted future revenues for Spinal Kinetics products, discount rate applied, and assumptions for potential volatility of the Company’s forecasted revenue. Significant changes in these assumptions could result in a significantly higher or lower fair value. The following table provides a reconciliation of the beginning and ending balances for the contingent consideration measured at fair value using significant unobservable inputs (Level 3):
(U.S. Dollars, in thousands) |  | 2018 |
Contingent consideration at January 1 |  | $ | — |
Acquisition date fair value |  |  | 25,491 |
Increase in fair value recognized in operating expenses |  |  | 3,069 |
Contingent consideration at December 31 |  | $ | 28,560 |
On February 6, 2019, the Company obtained FDA approval of the M6-C artificial cervical disc for patients suffering from cervical disease degeneration. This approval triggered the Company’s payment obligation of $15.0 million of contingent consideration. The Company has accrued a liability of $13.6 million within other current liabilities as of December 31, 2018, and paid the $15.0 million FDA Milestone payment on February 14, 2019. The difference of $1.4 million between the payment and the accrued liability as of December 31, 2018, will be recognized as an operating expense during the first quarter of 2019.

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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