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Fair value measurements and investments | 12 Months Ended
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Dec. 31, 2021
Fair Value Measurements And Investment Disclosure [Abstract] |
Fair value measurements and investments |
1 2. | 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 authoritative 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, accounts receivable, accounts payable, long-term secured debt, available for sale debt securities, equity securities, contingent consideration, and deferred compensation plan liabilities. The carrying value of cash equivalents, restricted cash, accounts receivable, and accounts payable approximate fair value due to the short-term maturities of these instruments. The Company’s secured revolving credit facility carries a floating rate of interest, and therefore, the carrying value of long-term debt is considered to approximate the fair value. The Company’s available for sale debt securities, equity securities, 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, 2021 |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Neo Medical convertible loan agreements |  | $ | 7,148 |  |  | $ | — |  |  | $ | — |  |  | $ | 7,148 |
Neo Medical preferred equity securities |  |  | 5,413 |  |  |  | — |  |  |  | 5,413 |  |  |  | — |
Bone Biologics equity securities |  |  | 309 |  |  |  | 309 |  |  |  | — |  |  |  | — |
Other investments |  |  | 1,505 |  |  |  | — |  |  |  | — |  |  |  | 1,505 |
Total |  | $ | 14,375 |  |  | $ | 309 |  |  | $ | 5,413 |  |  | $ | 8,653 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Spinal Kinetics contingent consideration |  | $ | (17,200 | ) |  | $ | — |  |  | $ | — |  |  | $ | (17,200 | )
Other contingent consideration |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Deferred compensation plan |  |  | (1,314 | ) |  |  | — |  |  |  | (1,314 | ) |  |  | — |
Total |  | $ | (18,514 | ) |  | $ | — |  |  | $ | (1,314 | ) |  | $ | (17,200 | )
(U.S. Dollars, in thousands) |  | Balance December 31, 2020 |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Neo Medical convertible loan agreement |  | $ | 7,160 |  |  | $ | — |  |  | $ | — |  |  | $ | 7,160 |
Neo Medical preferred equity securities |  |  | 5,000 |  |  |  | — |  |  |  | 5,000 |  |  |  | — |
Bone Biologics equity securities |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total |  | $ | 12,160 |  |  | $ | — |  |  | $ | 5,000 |  |  | $ | 7,160 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Spinal Kinetics contingent consideration |  | $ | (35,400 | ) |  | $ | — |  |  | $ | — |  |  | $ | (35,400 | )
Other contingent consideration |  |  | (375 | ) |  |  | — |  |  |  | — |  |  |  | (375 | )
Deferred compensation plan |  |  | (1,441 | ) |  |  | — |  |  |  | (1,441 | ) |  |  | — |
Total |  | $ | (37,216 | ) |  | $ | — |  |  | $ | (1,441 | ) |  | $ | (35,775 | )
The fair value of the Company’s deferred compensation plan liabilities are determined based on inputs that are readily available in public markets or that can be derived from information available in publicly quoted markets; therefore, the Company has categorized this liability as a Level 2 financial instrument. Neo Medical Convertible Loan Agreements and Equity Investment On October 1, 2020, the Company purchased shares of Neo Medical’s preferred stock 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 loan bears interest at 8.0%, with interest due semi-annually. At each interest payment date, the borrower may elect to capitalize any interest due to the then outstanding principal balance of the loan. The Convertible Loan matures on October 1, 2024. 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 may be convertible by either party into shares of Neo Medical’s preferred stock. The Company may convert the loan at its own election at any time prior to the full repayment or settlement of the Convertible Loan. Neo Medical may elect to convert the loan only in the event of a qualified financing event, as defined within the agreement. The price per share at which the loan converts is dependent upon i) the party electing conversion and ii) Neo Medical’s price per share in its most recent fundraising activities at the time of conversion, as specified within the agreement. On October 10, 2021, the Company entered into an additional Convertible Loan Agreement (the “Additional Convertible Loan”), separate and distinct from the investment made in 2020, pursuant to which the Company loaned Neo Medical an additional CHF 0.6 million ($0.7 million as of the issuance date). The Company made the election to convert the Additional Convertible Loan into shares of Neo Medical’s preferred stock in January 2022. 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. In November 2021, Neo Medical completed a qualified capital increase. As such, the Company adjusted the carrying amount of its equity investment to reflect the change in observable price and recorded a $0.4 million unrealized gain recognized in other income. The table below presents a reconciliation of the carrying value of the Company’s investment in Neo Medical preferred equity securities for the years ended December 31, 2021, and 2020:
(U.S. Dollars, in thousands) |  | 2021 |  |  | 2020 |
Fair value of Neo Medical preferred equity securities at January 1 |  | $ | 5,000 |  |  | $ | — |
Additions |  |  | — |  |  |  | 5,000 |
Foreign currency remeasurement recognized in other income, net |  |  | 77 |  |  |  | — |
Unrealized gain recognized in other income (expense), net |  |  | 336 |  |  |  | — |
Fair value of Neo Medical preferred equity securities at December 31 |  |  | 5,413 |  |  |  | 5,000 |
Both of the Convertible Loans are recorded in other long-term assets as available for sale debt securities as of December 31, 2021. These Convertible Loans are recorded at fair value, with applicable interest recorded in interest income. The fair value of the Convertible Loans is based upon significant unobservable inputs, including the use of option-pricing models, Monte Carlo simulations for certain periods, and a probability-weighted discounted cash flows model, requiring the Company to develop its own assumptions. Therefore, the Company has categorized these assets as Level 3 financial assets. Some of the more significant unobservable inputs used in the fair value measurement of the Loans include applicable discount rates, implied volatility, the likelihood and projected timing of repayment or conversion, 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 Loans. If the amortized cost of the Convertible Loans exceeds their estimated fair value, the securities are deemed to be impaired, and must be evaluated for the recognition of credit losses. Impairment resulting from credit losses is recognized within the statement of income, while impairment resulting from other factors is recognized within other comprehensive income (loss). As of December 31, 2021, the Company has not recognized any credit losses related to the Convertible Loans. The following table provides a reconciliation of the beginning and ending balances of the Convertible Loans, measured at fair value using significant unobservable inputs (Level 3):
(U.S. Dollars, in thousands) |  | 2021 |  |  | 2020 |
Fair value of Neo Medical Convertible Loans at January 1 |  | $ | 7,160 |  |  | $ | — |
Additions |  |  | 671 |  |  |  | 5,000 |
Interest recognized in interest income, net |  |  | 421 |  |  |  | 103 |
Foreign currency remeasurement recognized in other income (expense), net |  |  | (162 | ) |  |  | 176 |
Unrealized gain (loss) recognized in other comprehensive income (loss) |  |  | (942 | ) |  |  | 1,881 |
Fair value of Neo Medical Convertible Loans at December 31 |  |  | 7,148 |  |  |  | 7,160 |
Amortized cost basis of Neo Medical Convertible Loans at December 31 |  |  | 6,209 |  |  |  | 5,279 |
The following table provides quantitative information related to certain key assumptions utilized within the valuation of the Convertible Loans as of December 31, 2021:
(U.S. Dollars, in thousands) |  | Fair Value as of December 31, 2021 |  |  | Unobservable inputs |  | Estimate |
Neo Medical Convertible Loans |  | $ | 7,148 |  |  | Cost of equity discount rate |  |  | 16.1 | %
|  |  |  |  |  | Implied volatility |  |  | 67.8 | %
Bone Biologics Equity Securities The Company holds an investment in common stock of Bone Biologics Inc. (“Bone Biologics”), a developer of orthobiologic products. Prior to 2021, the equity securities were considered an investment that did not have a readily determinable fair value as Bone Biologics was privately held. As such, the Company measured 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 2020, the Company recognized an impairment of $0.2 million as a result of concerns over Bone Biologics’ ability to continue as a going concern. In the fourth quarter of 2021, Bone Biologics completed a public offering of units, with each unit consisting of one share of common stock and one warrant to purchase common shares. As a result of the public offering, Bone Biologics’ common stock is now actively traded on the NASDAQ (ticker BBLG). The Company concluded the investment represented a Level 1 fair value measurement subsequent to the public offering as the common shares now have quoted prices in active markets for identical assets. As such, the Company now records the investment at fair value, with changes in fair value recorded within other income (expense), net. The following table presents the changes in fair value recognized for the equity securities for each of the years ended December 31, 2021, 2020, and 2019:
(U.S. Dollars, in thousands) |  | 2021 |  |  | 2020 |  |  | 2019 |
Bone Biologics equity securities at January 1 |  | $ | — |  |  | $ | 219 |  |  | $ | 219 |
Fair value adjustments and impairments recognized in other income (expense), net |  |  | 309 |  |  |  | (219 | ) |  |  | — |
Bone Biologics equity securities at December 31 |  | $ | 309 |  |  | $ | — |  |  | $ | 219 |
Other investments Other investments represent other assets and investments recorded at fair value that are not deemed to be material for disclosure on an individual basis. The fair value of these assets are based upon significant unobservable inputs, such as probability-weighted discounted cash flows models, requiring the Company to develop its own assumptions. Therefore, the Company has categorized these assets as Level 3 financial assets. As of December 31, 2021, this balance was classified within other long-term assets. 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. The FDA Milestone was achieved and paid in 2019. A second milestone payment, totaling $15.0 million, was achieved and paid in 2021 upon meeting certain net sales targets. The estimated fair value of the remaining Spinal Kinetics contingent consideration was $17.2 million as of December 31, 2021. The estimated fair value reflects assumptions made by management as of December 31, 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 December 31, 2021, the Company has classified the $17.2 million liability within other current liabilities, as the Company currently expects to achieve the remaining milestone in the next twelve months. 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 contingent consideration measured at fair value using significant unobservable inputs (Level 3):
(U.S. Dollars, in thousands) |  | 2021 |  |  | 2020 |
Spinal Kinetics contingent consideration at January 1 |  | $ | 35,400 |  |  | $ | 42,700 |
Decrease in fair value recognized in acquisition-related amortization and remeasurement |  |  | (3,200 | ) |  |  | (7,300 | )
Payment made |  |  | (15,000 | ) |  |  | — |
Spinal Kinetics contingent consideration at December 31 |  | $ | 17,200 |  |  | $ | 35,400 |
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 Motion Preservation 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 December 31, 2021:
(U.S. Dollars, in thousands) |  | Fair Value as of December 31, 2021 |  |  | Valuation Technique |  | Unobservable inputs |  | Range
Spinal Kinetics contingent consideration |  | $ | 17,200 |  |  | Discounted cash flow |  | Revenue discount rate |  | 7.13% - 7.55%
|  |  |  |  |  |  |  | Payment discount rate |  | 3.38% - 3.81%
|  |  |  |  |  |  |  | Projected year of achievement |  | 2022
eNeura Debt Security Until October of 2019, the Company held a debt security of eNeura, Inc. (“eNeura”), a privately held medical technology company that was developing devices for the treatment of migraines. In October 2019, the Company and eNeura settled the debt security for a $4.0 million cash payment. As such, the Company determined the investment was impaired and adjusted the carrying value of the debt security to 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.

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