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Fair value measurements and investments | 6 Months Ended
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Jun. 30, 2022
Fair Value Measurements And Investment Disclosure [Abstract] |
Fair value measurements and investments | 6. 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:
|  | June 30, 2022 |  |  | December 31, 2021 |
(U.S. Dollars, in thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |  |  | Total |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Neo Medical convertible loan agreements |  | $ | — |  |  | $ | — |  |  | $ | 5,820 |  |  | $ | 5,820 |  |  | $ | 7,148 |
Neo Medical preferred equity securities |  |  | — |  |  |  | 6,084 |  |  |  | — |  |  |  | 6,084 |  |  |  | 5,413 |
Bone Biologics equity securities |  |  | 80 |  |  |  | — |  |  |  | — |  |  |  | 80 |  |  |  | 309 |
Other investments |  |  | — |  |  |  | — |  |  |  | 1,666 |  |  |  | 1,666 |  |  |  | 1,505 |
Total |  | $ | 80 |  |  | $ | 6,084 |  |  | $ | 7,486 |  |  | $ | 13,650 |  |  | $ | 14,375 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Spinal Kinetics contingent consideration |  | $ | — |  |  | $ | — |  |  | $ | (986 | ) |  | $ | (986 | ) |  | $ | (17,200 | )
Deferred compensation plan |  |  | — |  |  |  | (1,245 | ) |  |  | — |  |  |  | (1,245 | ) |  |  | (1,314 | )
Total |  | $ | — |  |  | $ | (1,245 | ) |  | $ | (986 | ) |  | $ | (2,231 | ) |  | $ | (18,514 | )
Neo Medical Convertible Loan Agreements and Equity Investment In October 2020, the Company purchased preferred equity securities of Neo Medical SA, a privately held Swiss-based company developing a new generation of products for spinal surgery ("Neo Medical"), for consideration of $5.0 million. The Company also entered into a Convertible Loan Agreement pursuant to which Orthofix loaned Neo Medical CHF 4.6 million, or $5.0 million at the date of issuance (the “Convertible Loan”). In October 2021, the Company entered into an additional Convertible Loan Agreement (the “Additional Convertible Loan”), pursuant to which the Company loaned Neo Medical an additional CHF 0.6 million, or $0.7 million as of the date of issuance. 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. The table below presents a reconciliation of the beginning and ending balances of the Company’s investment in Neo Medical preferred equity securities:
(U.S. Dollars, in thousands) |  | 2022 |  |  | 2021 |
Fair value of Neo Medical preferred equity securities at January 1 |  | $ | 5,413 |  |  | $ | 5,000 |
Conversion of loan into preferred equity securities |  |  | 671 |  |  |  | — |
Fair value of Neo Medical preferred equity securities at June 30 |  |  | 6,084 |  |  |  | 5,000 |
Cumulative unrealized gain on Neo Medical preferred equity securities |  |  | 413 |  |  |  | — |
The Company made an election to convert the Additional Convertible Loan into shares of Neo Medical’s preferred equity securities in January 2022. The remaining Convertible Loan is recorded in other long-term assets as an available for sale debt security as of June 30, 2022. The Convertible Loan is recorded at fair value, with applicable interest recorded in interest income. The fair value of the Convertible Loan 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 flow model, requiring the Company to develop its own assumptions. Therefore, the Company categorized these investments as Level 3 financial assets. 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, 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 a credit loss. As of June 30, 2022, the Company has not recognized any credit loss related to the Convertible Loan. 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) |  | 2022 |  |  | 2021 |
Fair value of Neo Medical Convertible Loans at January 1 |  | $ | 7,148 |  |  | $ | 7,160 |
Interest recognized in interest income, net |  |  | 217 |  |  |  | 198 |
Foreign currency remeasurement recognized in other expense, net |  |  | (257 | ) |  |  | (230 | )
Unrealized loss recognized in other comprehensive loss |  |  | (615 | ) |  |  | (628 | )
Conversion of loan into preferred equity securities |  |  | (671 | ) |  |  | — |
Fair value of Neo Medical Convertible Loans at June 30 |  |  | 5,820 |  |  |  | 6,500 |
Amortized cost basis of Neo Medical Convertible Loans at June 30 |  |  | 5,496 |  |  |  | 5,247 |
The following table provides quantitative information related to certain key assumptions utilized within the valuation as of June 30, 2022:
(U.S. Dollars, in thousands) |  | Fair Value as of June 30, 2022 |  |  | Unobservable inputs |  | Estimate |
Neo Medical Convertible Loan |  | $ | 5,820 |  |  | Cost of equity discount rate |  |  | 17.0 | %
|  |  |  |  | Implied volatility |  |  | 73.4 | %
Bone Biologics Equity Securities The Company holds an investment in common stock of Bone Biologics Inc. (“Bone Biologics”, NASDAQ: BBLG), a developer of orthobiologic products. Changes in the fair value of the investment recorded during the six months ended June 30, 2022 and 2021, are shown in the table below:
(U.S. Dollars, in thousands) |  | 2022 |  |  | 2021 |
Bone Biologics equity securities at January 1 |  | $ | 309 |  |  | $ | — |
Fair value adjustments recognized in other expense, net |  |  | (186 | ) |  |  | — |
Proceeds from the disposition of equity securities |  |  | (42 | ) |  |  | — |
Bone Biologics equity securities at June 30 |  | $ | 80 |  |  | $ | — |
Other investments Other investments represent 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 flow models, requiring the Company to develop its own assumptions. Therefore, the Company has categorized these assets as Level 3 financial assets. As of June 30, 2022, this balance was classified within other long-term assets. Spinal Kinetics 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 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 sales of the acquired artificial discs. To trigger the applicable payments, milestones must be achieved within five years of April 30, 2018. The FDA Milestone was achieved and paid in 2019 and a revenue-based milestone payment, totaling $15.0 million, was achieved and paid in 2021 upon meeting certain net sales targets. 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). The $16.2 million decrease in fair value of the contingent consideration liability in 2022 reflects the lower likelihood of the Company achieving the revenue-based milestone prior to April 30, 2023.
(U.S. Dollars, in thousands) |  | 2022 |  |  | 2021 |
Spinal Kinetics contingent consideration estimated fair value at January 1 |  | $ | 17,200 |  |  | $ | 35,400 |
Increase (decrease) in fair value recognized in acquisition-related amortization and remeasurement |  |  | (16,214 | ) |  |  | 300 |
Payment made |  |  | — |  |  |  | (15,000 | )
Spinal Kinetics contingent consideration estimated fair value at June 30 |  | $ | 986 |  |  | $ | 20,700 |
The estimated fair value of the remaining Spinal Kinetics contingent consideration, attributable to a revenue-based milestone, was $1.0 million as of June 30, 2022. The estimated fair value reflects assumptions made by management as of June 30, 2022, 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, if achieved, 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 fully reversed if the milestone is not met within the required timeline). As of June 30, 2022, the Company has classified the $1.0 million liability within other current liabilities, as milestones must be achieved prior to April 30, 2023, to trigger payment. Any changes in fair value are recorded as an operating expense within acquisition-related amortization and remeasurement. The Company estimated the fair value of the remaining potential 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 the Motion Preservation product line (which is derived from the acquired Spinal Kinetics business), 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 June 30, 2022:
(U.S. Dollars, in thousands) |  | Fair Value as of June 30, 2022 |  |  | Valuation Technique |  | Unobservable inputs |  | Range
Spinal Kinetics contingent consideration |  | $ | 986 |  |  | Discounted cash flow |  | Revenue discount rate |  | 5.9% - 7.3%
|  |  |  |  |  |  | Payment discount rate |  | 7.6% - 8.9%

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