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Fair value measurements and investments | 12 Months Ended
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Dec. 31, 2023
Fair Value Measurements And Investment Disclosure [Abstract] |
Fair value measurements and investments | 12. 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, 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, accounts receivable, and accounts payable approximate fair value due to the short-term maturities of these instruments. The Company’s secured term loan carries a floating rate of interest; 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) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Balance December 31, 2023 |
Assets |  |  |  |  |  |  |  |  |  |  |  |
Neo Medical convertible loan agreement |  | $ | — |  |  | $ | — |  |  | $ | 6,760 |  |  | $ | 6,760 |
Neo Medical preferred equity securities |  |  | — |  |  |  | 4,951 |  |  |  | — |  |  |  | 4,951 |
Bone Biologics equity securities |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Other investments |  |  | — |  |  |  | — |  |  |  | 1,309 |  |  |  | 1,309 |
Total |  | $ | — |  |  | $ | 4,951 |  |  | $ | 8,069 |  |  | $ | 13,020 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Lattus contingent consideration |  | $ | — |  |  | $ | — |  |  | $ | (8,500 | ) |  | $ | (8,500 | )
Spinal Kinetics contingent consideration |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Deferred compensation plan |  |  | — |  |  |  | (1,674 | ) |  |  | — |  |  |  | (1,674 | )
Total |  | $ | — |  |  | $ | (1,674 | ) |  | $ | — |  |  | $ | (10,174 | )
(U.S. Dollars, in thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Balance December 31, 2022 |
Assets |  |  |  |  |  |  |  |  |  |  |  |
Neo Medical convertible loan agreements |  | $ | — |  |  | $ | — |  |  | $ | 7,140 |  |  | $ | 7,140 |
Neo Medical preferred equity securities |  |  | — |  |  |  | 6,084 |  |  |  | — |  |  |  | 6,084 |
Bone Biologics equity securities |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Other Investments |  |  | — |  |  |  | — |  |  |  | 1,726 |  |  |  | 1,726 |
Total |  | $ | — |  |  | $ | 6,084 |  |  | $ | 7,140 |  |  | $ | 14,950 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Spinal Kinetics contingent consideration |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Deferred compensation plan |  |  | — |  |  |  | (1,515 | ) |  |  | — |  |  |  | (1,515 | )
Total |  | $ | — |  |  | $ | (1,515 | ) |  | $ | — |  |  | $ | (1,515 | )
The fair value of the Company’s deferred compensation plan liabilities is 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 (the “Convertible Loan”) pursuant to which Orthofix loaned Neo Medical CHF 4.6 million, or $5.0 million at the date of issuance. The Convertible 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. 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 ($0.7 million as of the issuance date). In January 2022, the Company elected to convert the Additional Convertible Loan into shares of Neo Medical’s preferred stock. 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 carrying value of the Company’s investment in Neo Medical preferred equity securities for the years ended December 31, 2023, and 2022:
(U.S. Dollars, in thousands) |  | 2023 |  |  | 2022 |
Fair value of Neo Medical preferred equity securities at January 1 |  | $ | 6,084 |  |  | $ | 5,413 |
Conversion of loan into preferred equity securities |  |  | — |  |  |  | 671 |
Foreign currency remeasurement recognized in other income, net |  |  | 388 |  |  |  | — |
Unrealized loss recognized in other income (expense), net |  |  | (1,521 | ) |  |  | — |
Fair value of Neo Medical preferred equity securities at December 31 |  | $ | 4,951 |  |  | $ | 6,084 |
Cumulative unrealized gain (loss) on Neo Medical preferred equity securities |  |  | (720 | ) |  |  | 413 |
The Convertible Loan is recorded in other current assets as an available for sale debt security as of December 31, 2023, while as of December 31, 2022, this balance was classified within other long-term assets. 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 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, 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. 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, 2023, the Company has recognized $0.3 million in credit losses related to the Convertible Loan. The following table provides a reconciliation of the beginning and ending balances of the Convertible Loan(s), measured at fair value using significant unobservable inputs (Level 3):
(U.S. Dollars, in thousands) |  | 2023 |  |  | 2022 |
Fair value of Neo Medical Convertible Loans at January 1 |  | $ | 7,140 |  |  | $ | 7,148 |
Additions |  |  | — |  |  |  | — |
Interest recognized in interest income, net |  |  | 496 |  |  |  | 436 |
Foreign currency remeasurement recognized in other income (expense), net |  |  | 617 |  |  |  | (67 | )
Unrealized gain (loss) recognized in other comprehensive income (loss) |  |  | (1,233 | ) |  |  | 294 |
Expected credit loss recognized in other income (expense), net |  |  | (260 | ) |  |  | — |
Conversion of Additional Convertible Loan into preferred equity securities |  |  | — |  |  |  | (671 | )
Fair value of Neo Medical Convertible Loans at December 31 |  | $ | 6,760 |  |  | $ | 7,140 |
Contractual value of Neo Medical Convertible Loans at December 31 |  | $ | 7,020 |  |  | $ | 5,907 |
Allowance for credit loss recognized in other income (expense), net |  |  | (260 | ) |  |  | — |
Amortized cost basis of Neo Medical Convertible Loans at December 31 |  | $ | 6,760 |  |  | $ | 5,907 |
The following table provides quantitative information related to certain key assumptions utilized within the valuation of the Convertible Loan as of December 31, 2023:
(U.S. Dollars, in thousands) |  | Fair Value as of December 31, 2023 |  |  | Unobservable inputs |  | Estimate |
Neo Medical Convertible Loan |  | $ | 6,760 |  |  | Cost of equity discount rate |  |  | 19.3 | %
|  |  |  |  | Present value factor |  |  | 15.3 | %
|  |  |  |  | Implied volatility |  |  | 81.1 | %
Bone Biologics Equity Securities Until August of 2022, the Company held 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 had very limited trading volumes. As such, the Company measured the investments at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. In 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, Bone Biologics’ common stock became 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 subsequently had quoted prices in active markets for identical assets. As such, the Company recorded the investment at fair value, with changes in fair value recorded within other income (expense), net, subsequent to the public offering. The following table presents the changes in fair value recognized for each of the years ended December 31, 2023, 2022, and 2021:
(U.S. Dollars, in thousands) |  | 2023 |  |  | 2022 |  |  | 2021 |
Bone Biologics equity securities at January 1 |  | $ | — |  |  | $ | 309 |  |  | $ | — |
Fair value adjustments and impairments recognized in other income (expense), net |  |  | — |  |  |  | (183 | ) |  |  | 309 |
Proceeds from the disposition of equity securities |  |  | — |  |  |  | (126 | ) |  |  | — |
Bone Biologics equity securities at December 31 |  | $ | — |  |  | $ | — |  |  | $ | 309 |
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 is 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. This balance is classified within other current assets as of December 31, 2023, and was classified in other long-term assets as of December 31, 2022. Spinal Kinetics Contingent Consideration The Company recognized a contingent consideration obligation in connection with the acquisition of Spinal Kinetics in 2018. The fair value of the remaining Spinal Kinetics contingent consideration, attributable to a revenue-based milestone, was concluded to be zero as the Company did not achieve the milestone prior to April 30, 2023, the end of the measurement period for achieving such milestone. 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) |  | 2023 |  |  | 2022 |
Spinal Kinetics contingent consideration at January 1 |  | $ | — |  |  | $ | 17,200 |
Decrease in fair value recognized in acquisition-related amortization and remeasurement |  |  | — |  |  |  | (17,200 | )
Payment made |  |  | — |  |  |  | — |
Spinal Kinetics contingent consideration at December 31 |  | $ | — |  |  | $ | — |
Lattus Contingent Consideration In connection with the Merger, the Company assumed a contingent consideration obligation under a purchase agreement between SeaSpine and Lattus Spine LLC ("Lattus") executed in December 2022. Under the terms of the agreement, the Company may be required to make installment payments at certain dates based on future net sales of certain products (the "Lateral Products"). The estimated fair value of the Lattus contingent consideration is determined using a Monte Carlo simulation and a discounted cash flow model requiring significant inputs which are not observable in the market. The significant inputs include assumptions related to the timing and probability of certain product launch dates, estimated future sales of Lateral Products, revenue risk-adjusted discount rate, revenue volatility, and discount rates matched to the timing of payments. The following table provides a reconciliation of the beginning and ending balances for the Lattus contingent consideration measured at estimated fair value using significant unobservable inputs (Level 3):
(U.S. Dollars, in thousands) |  | 2023 |  |  | 2022 |
Lattus contingent consideration estimated fair value at January 5 |  | $ | 11,200 |  |  | $ | — |
Decrease in fair value recognized in acquisition-related amortization and remeasurement |  |  | (2,700 | ) |  |  | — |
Lattus contingent consideration estimated fair value at December 31 |  | $ | 8,500 |  |  | $ | — |
The following table provides quantitative information related to certain key assumptions utilized within the valuation as of December 31, 2023:
(U.S. Dollars, in thousands) |  | Fair Value as of December 31, 2023 |  |  | Unobservable inputs |  | Estimate |
Lattus Contingent Consideration |  | $ | 8,500 |  |  | Counterparty discount rate |  |  | 14.0 | %
|  |  |  |  | Revenue risk-adjusted discount rate |  |  | 6.5 | %

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