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Fair value measurements and investments | 12 Months Ended
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Dec. 31, 2019
Fair Value Measurements And Investment Disclosure [Abstract] |
Fair value measurements and investments |
11. | Fair value measurements and investments
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 authorit ative 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, 2019 |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity securities |  | $ | 219 |  |  | $ | — |  |  | $ | 219 |  |  | $ | — |
Total |  | $ | 219 |  |  | $ | — |  |  | $ | 219 |  |  | $ | — |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | (42,700 | ) |  | $ | — |  |  | $ | — |  |  | $ | (42,700 | )
Deferred compensation plan |  |  | (1,255 | ) |  |  | — |  |  |  | (1,255 | ) |  |  | — |
Total |  | $ | (43,955 | ) |  | $ | — |  |  | $ | (1,255 | ) |  | $ | (42,700 | )
(U.S. Dollars, in thousands) |  | Balance December 31, 2018 |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Treasury securities |  | $ | 490 |  |  | $ | 490 |  |  | $ | — |  |  | $ | — |
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 | )
The fair value of treasury securities was determined based on quoted prices in active markets for identical assets, therefore, the Company 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 although the fair value of the warrants was reduced to zero in 2018. 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. In 2018, Bone Biologics completed a series of equity financing activities, which provided a new observable price change in an orderly transaction. As a result, the Company determined its investment was impaired and recorded a charge of $4.4 million in other expense, net. As of December 31, 2019, the Company holds common stock of Bone Biologics and warrants to purchase approximately 13 thousand shares at a weighted average exercise price of $10.00 per share (after adjusting the shares and exercise price for a reverse stock split executed by Bone Biologics in 2018). Under the terms of the warrant purchase agreements, the warrants to purchase common stock in Bone Biologics are exercisable over a seven year period, which expires in 2020, and are transferable by the holder to other parties. The changes in valuation of these securities for the years ended December 31, 2019, 2018, and 2017 are shown below:
(U.S. Dollars, in thousands) |  | 2019 |  |  | 2018 |  |  | 2017 |
Equity securities and warrants at January 1 |  | $ | 219 |  |  | $ | 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 |  |  | $ | 219 |  |  | $ | 2,768 |
Debt Security Until October of 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 principal amount of the debt security was $15.0 million and accrued interest at 8.0%, with payment due at maturity. 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, 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. The Company evaluated any declines in fair value, if any, each quarter to determine if impairments are other-than-temporary. The debt security had an amortized cost basis of $9.0 million at the time of the restructuring and as of December 31, 2018. 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 (loss) 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, 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 included a reclassification of the related unrealized gains included in accumulated other comprehensive income (loss) of $5.2 million. 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) |  | 2019 |  |  | 2018 |  |  | 2017 |
Balance at January 1 |  | $ | 17,820 |  |  | $ | 16,050 |  |  | $ | 12,220 |
Gains (losses) recorded for the period |  |  |  |  |  |  |  |  |  |  |  |
Recognized in other expense, net |  |  | — |  |  |  | — |  |  |  | (5,585 | )
Recognized in other comprehensive income (loss) |  |  | (2,593 | ) |  |  | 1,770 |  |  |  | 9,415 |
Change in classification of debt security to held to maturity |  |  | (15,227 | ) |  |  | — |  |  |  | — |
Issuance of Warrant as consideration for extension |  |  | 491 |  |  |  | — |  |  |  | — |
Impairment of Warrant |  |  | (491 | ) |  |  | — |  |  |  | — |
Balance at December 31 |  | $ | — |  |  | $ | 17,820 |  |  | $ | 16,050 |
Contingent Consideration 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 upon FDA approval of the 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 acquired artificial discs (the “Revenue Milestones”). 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, which was paid on February 14, 2019. Prior to its payment, the Company estimated the fair value of the FDA Milestone using a probability-weighted discounted cash flow model. The fair value was based on significant unobservable inputs and thus represented a Level 3 measurement. The key assumptions affecting the fair value of the milestone payment included the Company’s estimation of the timing and probability of FDA approval. The Company estimates the fair value of the Revenue Milestones using a Monte Carlo simulation. This fair value measurement is based on significant unobservable inputs 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, the discount rates applied, and assumptions for potential volatility of forecasted revenue. Significant changes in these assumptions could result in a significantly higher or lower fair value. As of December 31, 2019, the estimated fair value of the remaining Revenue Milestones was $42.7 million; however, the actual amount ultimately paid could be higher or lower than this amount. As of December 31, 2019, the Company has classified $14.7 million of the liability within other current liabilities, as the Company expects to pay one of the Revenue Milestones in the next twelve months, and the remaining $28.0 million within other long-term liabilities. Any changes in fair value related to contingent consideration are recorded as an operating expense and included within acquisition-related amortization and remeasurement. 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 |  |  | 29,140 |  |  |  | 3,069 |
Payment made |  |  | (15,000 | ) |  |  | — |
Contingent consideration at December 31 |  | $ | 42,700 |  |  | $ | 28,560 |
The $29.1 million increase in fair value in 2019 is 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, subsequent to the Company’s launch of the product in the U.S. market upon receiving FDA approval.

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