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Fair value measurements and investments | 9 Months Ended
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Sep. 30, 2021
Fair Value Measurements And Investment Disclosure [Abstract] |
Fair value measurements and investments | 7. Fair value measurements and investments The fair value measurements of the Company’s financial assets and liabilities measured on a recurring basis were as follows:
|  | September 30, 2021 |  |  | December 31, 2020 |
(U.S. Dollars, in thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |  |  | Total |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Neo Medical preferred equity securities |  | $ | — |  |  | $ | 5,000 |  |  | $ | — |  |  | $ | 5,000 |  |  | $ | 5,000 |
Neo Medical convertible loan agreement |  |  | — |  |  |  | — |  |  |  | 7,080 |  |  |  | 7,080 |  |  |  | 7,160 |
Bone Biologics equity securities |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total |  | $ | — |  |  | $ | 5,000 |  |  | $ | 7,080 |  |  | $ | 12,080 |  |  | $ | 12,160 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Spinal Kinetics contingent consideration |  | $ | — |  |  | $ | — |  |  | $ | (18,400 | ) |  | $ | (18,400 | ) |  | $ | (35,400 | )
Other contingent consideration |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (375 | )
Deferred compensation plan |  |  | — |  |  |  | (1,405 | ) |  |  | — |  |  |  | (1,405 | ) |  |  | (1,441 | )
Total |  | $ | — |  |  | $ | (1,405 | ) |  | $ | (18,400 | ) |  | $ | (19,805 | ) |  | $ | (37,216 | )
Neo Medical Equity Investment and Convertible Loan Agreement On October 1, 2020, the Company purchased preferred shares of Neo Medical SA, a privately held Swiss-based Medtech company (“Neo Medical”), for consideration of $5.0 million and entered into a Convertible Loan Agreement pursuant to which Orthofix loaned Neo Medical CHF 4.6 million (the “Convertible Loan”). The equity securities are recorded in other long-term assets and are considered an investment that does not have a readily determinable fair value. As such, the Company measures this investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. As of September 30, 2021, the carrying value of this investment remained at $5.0 million. The Convertible Loan matures on October 1, 2024; however, if a change in control of Neo Medical occurs prior to the maturity date, the Convertible Loan shall become immediately due upon such event. The Convertible Loan is recorded in other long-term assets as an available for sale debt security at fair value, with applicable interest recorded in interest income. The fair value of the Convertible Loan, including accrued interest, is based upon significant unobservable inputs, including the use of Monte Carlo simulations, option-pricing models, and a probability-weighted 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 Convertible Loan include applicable discount rates, implied volatility, the likelihood and projected timing of repayment or conversion, the probability and amount of subsequent capital raises by Neo Medical in order to fund the business, and projected cash flows in support of the estimated enterprise value of Neo Medical. Holding other inputs constant, changes in these assumptions could result in a significant change in the fair value of the Convertible Loan. If the amortized cost of the Convertible Loan exceeds its estimated fair value, the security is deemed to be impaired, and must be evaluated for the recognition of credit losses. As of September 30, 2021, the Company has not recognized any credit losses related to the Convertible Loan. The following table provides a reconciliation of the beginning and ending balances of the Convertible Loan, measured at fair value using significant unobservable inputs (Level 3):
(U.S. Dollars, in thousands) |  | 2021 |  |  | 2020 |
Fair value of Neo Medical Convertible Loan at January 1 |  | $ | 7,160 |  |  | $ | — |
Interest recognized in interest income, net |  |  | 305 |  |  |  | — |
Foreign currency remeasurement recognized in other expense, net |  |  | (270 | ) |  |  | — |
Unrealized loss recognized in other comprehensive income (loss) |  |  | (115 | ) |  |  | — |
Fair value of Neo Medical Convertible Loan at September 30 |  |  | 7,080 |  |  |  | — |
Amortized cost basis of Neo Medical Convertible Loan at September 30 |  |  | 5,314 |  |  |  | — |
The following table provides quantitative information related to certain key assumptions utilized within the valuation as of September 30, 2021:
(U.S. Dollars, in thousands) |  | Fair Value as of September 30, 2021 |  |  | Unobservable inputs |  | Estimate |
Neo Medical Convertible Loan |  | $ | 7,080 |  |  | Cost of equity discount rate |  |  | 21.6 | %
|  |  |  |  |  | Implied volatility |  |  | 90.4 | %
Contingent Consideration The Company recognized a contingent consideration obligation in connection with the acquisition of Spinal Kinetics in 2018. The Spinal Kinetics contingent consideration consisted 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. The FDA Milestone was achieved and paid in 2019. A second milestone payment, totaling $15.0 million, was achieved in the first quarter of 2021 and paid in the second quarter of 2021 upon meeting certain net sales targets. The estimated fair value of the remaining Spinal Kinetics contingent consideration was $18.4 million as of September 30, 2021. The estimated fair value reflects assumptions made by management as of September 30, 2021, such as the expected timing and volume of elective procedures and the impact of these procedures on future revenues. However, the actual amount ultimately paid could be higher or lower than the fair value of the remaining contingent consideration (ultimate payment will either be $30.0 million or the liability will be reversed if the milestone is not met within the required timeline). As of September 30, 2021, the Company has classified the remaining contingent consideration liability 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) |  | 2021 |  |  | 2020 |
Spinal Kinetics contingent consideration estimated fair value at January 1 |  | $ | 35,400 |  |  | $ | 42,700 |
Decrease in fair value recognized in acquisition-related amortization and remeasurement |  |  | (2,000 | ) |  |  | (7,600 | )
Payment made |  |  | (15,000 | ) |  |  | — |
Spinal Kinetics contingent consideration estimated fair value at September 30 |  | $ | 18,400 |  |  | $ | 35,100 |
The Company estimated the fair value of the remaining potential future revenue-based milestone payment 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, 2021.
(U.S. Dollars, in thousands) |  | Fair Value as of September 30, 2021 |  |  | Valuation Technique |  | Unobservable inputs |  | Range
Spinal Kinetics contingent consideration |  | $ | 18,400 |  |  | Discounted cash flow |  | Revenue discount rate |  | 6.5% - 6.7%
|  |  |  |  |  |  |  | Payment discount rate |  | 3.9% - 4.0%
|  |  |  |  |  |  |  | Projected year of achievement |  | 2022

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