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Fair value measurements | 6 Months Ended
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Jun. 30, 2019
Fair Value Disclosures [Abstract] |
Fair value measurements | 7. Fair value measurements The fair value of the Company’s financial assets and liabilities measured on a recurring basis were as follows:
|  | June 30, 2019 |  |  | December 31, 2018 |
(U.S. Dollars, in thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |  |  | Total |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Treasury securities |  | $ | 502 |  |  | $ | — |  |  | $ | — |  |  | $ | 502 |  |  | $ | 490 |
Bone Biologics equity warrants |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Bone Biologics equity securities |  |  | — |  |  |  | 219 |  |  |  | — |  |  |  | 219 |  |  |  | 219 |
eNeura debt security |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 17,820 |
eNeura warrant |  |  | — |  |  |  | — |  |  |  | 491 |  |  |  | 491 |  |  |  | — |
Total |  | $ | 502 |  |  | $ | 219 |  |  | $ | 491 |  |  | $ | 1,212 |  |  | $ | 18,529 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | — |  |  | $ | — |  |  | $ | (19,430 | ) |  | $ | (19,430 | ) |  | $ | (28,560 | )
Deferred compensation plan |  |  | — |  |  |  | (1,314 | ) |  |  | — |  |  |  | (1,314 | ) |  |  | (1,275 | )
Total |  | $ | — |  |  | $ | (1,314 | ) |  | $ | (19,430 | ) |  | $ | (20,744 | ) |  | $ | (29,835 | )
Bone Biologics 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 are considered to have a fair value of zero. The equity securities are considered investments that do not have readily determinable fair values. As such, the Company measures these 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.
|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
(U.S. Dollars, in thousands) |  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Bone Biologics equity securities and warrants beginning balance |  | $ | 219 |  |  | $ | 4,897 |  |  | $ | 219 |  |  | $ | 2,768 |
Impact of adoption of ASU 2016-01 recognized in other income (expense), net |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,629 |
Purchase of additional common stock |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 500 |
Fair value adjustments, expirations, and impairments recognized in other income (expense), net |  |  | — |  |  |  | (229 | ) |  |  | — |  |  |  | (229 | )
Bone Biologics equity securities and warrants ending balance |  | $ | 219 |  |  | $ | 4,668 |  |  | $ | 219 |  |  | $ | 4,668 |
eNeura Debt Security and Warrant 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 was originally set to mature on March 4, 2019. On March 1, 2019, the Company entered into an Amended and Restated Senior Secured Promissory Note with eNeura (the “Restructured Debt Security”) to restructure the debt security, which extended the maturity date to the earlier of (i) March 4, 2022, (ii) the effective date of a change in control, or (iii) the effective date of an initial public offering by eNeura and which also eliminated the conversion feature included within the original note. As consideration for the extension, eNeura issued to the Company a Warrant to Purchase Common Stock (the “Warrant”), exercisable at $0.01 per share over a ten year contractual term, for a number of shares equal to 10% of the sum of the outstanding principal and accrued interest on the Amended and Restated Debt Security as of March 1, 2019, divided by $1.00 (subject to certain anti-dilution provisions). Prior to the restructuring on March 1, 2019, the debt security was accounted for as an available for sale debt security at fair value and included within other long-term assets. The fair value was based upon significant unobservable inputs, including the use of a discounted cash flow model and assumptions regarding the expected payback period for the debt security, requiring the Company to develop its own assumptions; therefore, the Company had categorized this asset as a Level 3 financial asset. Subsequent to the restructuring, the debt security is no longer classified as an available for sale debt security, but rather as a held to maturity debt security. As a result, the amounts included in accumulated other comprehensive income related to this debt security are now being amortized to interest income over the exten ded term of the Restructured Debt Security. For additional discussion regarding the Restructured Debt Security, see Note 8. The Warrant is recorded at fair value and included in other long-term assets. The fair value of the Warrant is based on significant unobservable inputs, including the use of a discounted cash flow model and an option-pricing model, requiring the Company to develop its own assumptions; therefore, the Company has categorized this asset as a Level 3 financial asset. As of June 30, 2019, the estimated fair value of the Warrant was $0.5 million. The Warrant is considered an investment that does not have a readily determinable fair value. As such, the Company measures the Warrant 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 following table provides a reconciliation of the beginning and ending balances for the eNeura debt security and Warrant measured and reflected in the condensed consolidated balance sheets at fair value using significant unobservable inputs (Level 3):
(U.S. Dollars, in thousands) |  | 2019 |  |  | 2018 |
eNeura debt security and Warrant at January 1 |  | $ | 17,820 |  |  | $ | 16,050 |
Gains or losses recorded for the period |  |  |  |  |  |  |  |
Recognized in other comprehensive income (loss) |  |  | (2,593 | ) |  |  | 1,960 |
Change in classification of debt security to held to maturity |  |  | (15,227 | ) |  |  | — |
Issuance of warrant as consideration for extension |  |  | 491 |  |  |  | — |
eNeura debt security and Warrant at June 30 |  | $ | 491 |  |  | $ | 18,010 |
Contingent Consideration The contingent consideration at the acquisition date of Spinal Kinetics consisted of potential future milestone payments of up to $60.0 million in cash. The milestone payments included (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. On February 6, 2019, the Company obtained FDA approval of the M6-C artificial cervical disc. This approval triggered the Company’s payment obligation of $15.0 million for the achievement of the FDA Milestone and such obligation was paid on February 14, 2019. The fair value of the remaining contingent consideration was $19.4 million as of June 30, 2019; however, the actual amount ultimately paid could be higher or lower than the fair value of the remaining contingent consideration. The remaining liability attributable to the revenue-based milestones is included within other long-term liabilities. Any changes in fair value are recorded as an operating expense and included within acquisition-related amortization and remeasurement. The Company estimated the fair value of the remaining 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) |  | 2019 |  |  | 2018 |
Contingent consideration at January 1 |  | $ | 28,560 |  |  | $ | — |
Acquisition date fair value |  |  | — |  |  |  | 25,491 |
Increase in fair value recognized in acquisition-related amortization and remeasurement |  |  | 5,870 |  |  |  | 1,109 |
Payment made |  |  | (15,000 | ) |  |  | — |
Contingent consideration at June 30 |  | $ | 19,430 |  |  | $ | 26,600 |

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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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