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Fair value measurements and investments | 9 Months Ended
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Sep. 30, 2019
Fair Value Measurements And Investment Disclosure [Abstract] |
Fair value measurements and investments | 7. Fair value measurements and investments The fair value of the Company’s financial assets and liabilities measured on a recurring basis were as follows:
|  | September 30, 2019 |  |  | December 31, 2018 |
(U.S. Dollars, in thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |  |  | Total |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Treasury securities |  | $ | 447 |  |  | $ | — |  |  | $ | — |  |  | $ | 447 |  |  | $ | 490 |
Bone Biologics equity warrants |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Bone Biologics equity securities |  |  | — |  |  |  | 219 |  |  |  | — |  |  |  | 219 |  |  |  | 219 |
eNeura debt security |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 17,820 |
eNeura warrant |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total |  | $ | 447 |  |  | $ | 219 |  |  | $ | — |  |  | $ | 666 |  |  | $ | 18,529 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | — |  |  | $ | — |  |  | $ | (41,700 | ) |  | $ | (41,700 | ) |  | $ | (28,560 | )
Deferred compensation plan |  |  | — |  |  |  | (1,242 | ) |  |  | — |  |  |  | (1,242 | ) |  |  | (1,275 | )
Total |  | $ | — |  |  | $ | (1,242 | ) |  | $ | (41,700 | ) |  | $ | (42,942 | ) |  | $ | (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, Inc. (“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 September 30, |  |  | Nine Months Ended September 30, |
(U.S. Dollars, in thousands) |  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Bone Biologics equity securities and warrants beginning balance |  | $ | 219 |  |  | $ | 4,668 |  |  | $ | 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 |  |  | — |  |  |  | (4,449 | ) |  |  | — |  |  |  | (4,678 | )
Bone Biologics equity securities and warrants ending balance |  | $ | 219 |  |  | $ | 219 |  |  | $ | 219 |  |  | $ | 219 |
eNeura Debt Security and Warrant As of September 30, 2019, the Company held a debt security of eNeura, Inc. (“eNeura”), 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 was no longer classified as an available for sale debt security, but rather as a held to maturity debt security. The debt security was reclassified from an available for sale debt security to a held to maturity debt security at its fair value on the date of the restructuring. As a result, the unrealized gains included in accumulated other comprehensive income related to the debt security were to be subsequently amortized to interest income over the remaining term of the Restructured Debt Security. The Warrant was recorded at fair value and included in other long-term assets. The fair value of the Warrant was 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 categorized this asset as a Level 3 financial asset. The Warrant was considered an investment that does not have a readily determinable fair value. As such, the Company measured 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. During the quarter ended September 30, 2019, the Company engaged in negotiations with eNeura to settle the Restructured Debt Security and on October 25, 2019, the Company and eNeura settled the Restructured Debt Security for a $4.0 million cash payment and agreed to transfer the Warrant to eNeura. As such, at September 30, 2019, the Company determined the Restructured Debt Security and Warrant were impaired and adjusted the carrying value of the Restructured Debt Security to $4.0 million, its settlement value, by recording a net other-than-temporary impairment of $6.5 million in other expense, net, which includes a reclassification of the related unrealized gains included in accumulated other comprehensive income of $5.2 million. Further, the Company also reclassified the remaining balance of the Restructured Debt Security to other current assets as payment was received within the next twelve months. During the three and nine months ended September 30, 2019, the Company recognized $0.5 and $1.5 million in interest income related to the eNeura debt security. The Company did not recognize any interest income during the three and nine months ended September 30, 2018. 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) prior to the settlement discussed above:
(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 | ) |  |  | 3,200 |
Change in classification of debt security to held to maturity |  |  | (15,227 | ) |  |  | — |
Issuance of Warrant as consideration for extension |  |  | 491 |  |  |  | — |
Impairment of Warrant |  |  | (491 | ) |  |  | — |
eNeura debt security and Warrant at September 30 |  | $ | — |  |  | $ | 19,250 |
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 estimated fair value of the remaining contingent consideration was $41.7 million as of September 30, 2019; however, the actual amount ultimately paid could be higher or lower than the fair value of the remaining contingent consideration. This resulted in the recognition of expense of $22.3 and $28.1 million during the three and nine months ended September 30, 2019, respectively, which was primarily attributable to a change in management’s forecast of future net sales of the artificial discs, including an acceleration of the expected timing of such future sales during the three months ended September 30, 2019, subsequent to the Company’s launch of the product in the U.S. At September 30, 2019, the Company has classified $14.5 million of the liability attributable to the revenue-based milestones within other current liabilities, as the Company expects to pay one of the revenue-based milestones in the next twelve months, and the remaining $27.2 million 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 |  |  | 28,140 |  |  |  | 2,689 |
Payment made |  |  | (15,000 | ) |  |  | — |
Contingent consideration at September 30 |  | $ | 41,700 |  |  | $ | 28,180 |

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