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Fair value measurements and investments | 9 Months Ended
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Sep. 30, 2020
Fair Value Measurements And Investment Disclosure [Abstract] |
Fair value measurements and investments | 8. 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, 2020 |  |  | December 31, 2019 |
(U.S. Dollars, in thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |  |  | Total |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Bone Biologics equity securities |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 219 |
Total |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 219 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Spinal Kinetics contingent consideration |  | $ | — |  |  | $ | — |  |  | $ | (35,100 | ) |  | $ | (35,100 | ) |  | $ | (42,700 | )
Other contingent consideration |  | $ | — |  |  | $ | — |  |  | $ | (375 | ) |  | $ | (375 | ) |  | $ | — |
Deferred compensation plan |  |  | — |  |  |  | (1,366 | ) |  |  | — |  |  |  | (1,366 | ) |  |  | (1,255 | )
Total |  | $ | — |  |  | $ | (1,366 | ) |  | $ | (35,475 | ) |  | $ | (36,841 | ) |  | $ | (43,955 | )
Contingent Consideration The Company recognized a contingent consideration obligation in connection with the acquisition of Spinal Kinetics in 2018. The Spinal Kinetics contingent consideration consists of potential future milestone payments of up to $60.0 million in cash. The milestone payments included (i) $15.0 million upon U.S. Food and Drug Administration (“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. Milestones must be achieved within five years of April 30, 2018 to trigger applicable payments. In February 2019, the FDA Milestone was achieved and paid. The estimated fair value of the remaining Spinal Kinetics contingent consideration was $35.1 million as of September 30, 2020. The estimated fair value reflects assumptions made by management as of September 30, 2020, including the impact of COVID-19 on significant unobservable assumptions, such as the expected timing and volume of elective procedures and the impact of these procedures on future revenues. However, the impact of COVID-19 on the Company’s business remains uncertain and difficult to predict. As information surrounding the pandemic is continuing to evolve, the actual amount ultimately paid could be higher or lower than the fair value of the remaining contingent consideration. At September 30, 2020, the Company has classified $14.7 million of the liability attributable to the revenue-based milestone within other current liabilities, as the Company currently expects to pay one of the revenue-based milestones in the next twelve months, and the remaining $20.4 million within other long-term liabilities. Any changes in fair value are recorded as an operating expense within acquisition-related amortization and remeasurement. The following table provides a reconciliation of the beginning and ending balances for the Spinal Kinetics contingent consideration measured at estimated fair value using significant unobservable inputs (Level 3):
(U.S. Dollars, in thousands) |  | 2020 |  |  | 2019 |
Spinal Kinetics contingent consideration estimated fair value at January 1 |  | $ | 42,700 |  |  | $ | 28,560 |
Increase (decrease) in fair value recognized in acquisition-related amortization and remeasurement |  |  | (7,600 | ) |  |  | 28,140 |
Payment made |  |  | — |  |  |  | (15,000 | )
Spinal Kinetics contingent consideration estimated fair value at September 30 |  | $ | 35,100 |  |  | $ | 41,700 |
The $7.6 million decrease in fair value in 2020 is primarily attributable to a change in management’s forecast of future net sales of artificial discs because of uncertainty in the market and the economy attributable to COVID-19. The Company estimated the fair value of the remaining potential future revenue-based milestone payments using a Monte Carlo simulation and a discounted cash flow model. 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 valuation model include the Company’s forecasted future revenues for Spinal Kinetics products, the expected timing of payment, applicable discount rates 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 range of key assumptions used within the valuation as of September 30, 2020.
(U.S. Dollars, in thousands) |  | Fair Value as of September 30, 2020 |  |  | Valuation Technique |  | Unobservable inputs |  | Range
Spinal Kinetics contingent consideration |  | $ | 35,100 |  |  | Discounted cash flow |  | Revenue discount rate |  | 7.41% - 7.49%
|  |  |  |  |  |  |  | Payment discount rate |  | 4.33% - 4.40%
|  |  |  |  |  |  |  | Projected year of payment |  | 2021 - 2022
Other contingent consideration is attributable to an agreement closed in the third quarter of 2020 to acquire certain assets of a medical device distributor as a portion of the consideration is based upon meeting certain revenue-based targets. eNeura Debt Security and Warrant Until October of 2019, the Company held a debt security and a related warrant to purchase common stock of eNeura, Inc. (“eNeura”), a privately held medical technology company that is developing devices for the treatment of migraines. On October 25, 2019, the Company and eNeura settled the debt security for a $4.0 million cash payment and agreed to transfer the warrant to eNeura as part of such settlement. 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. 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) |  | 2020 |  |  | 2019 |
eNeura debt security and Warrant at January 1 |  | $ | — |  |  | $ | 17,820 |
Gains or losses recorded for the period |  |  |  |  |  |  |  |
Recognized in other comprehensive income (loss) |  |  | — |  |  |  | (2,593 | )
Change in classification of debt security to held to maturity |  |  | — |  |  |  | (15,227 | )
Issuance of Warrant as consideration for prior extension of debt maturity date |  |  | — |  |  |  | 491 |
Impairment of warrant |  |  | — |  |  |  | (491 | )
eNeura debt security and Warrant at September 30 |  | $ | — |  |  | $ | — |

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