Fair value measurements and investments

9 Months Ended

Sep. 30, 2024

Fair Value Measurements And Investment Disclosure [Abstract]

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, 2024											December 31, 2023
(U.S. Dollars, in thousands)	Level 1		Level 2			Level 3			Total			Total
									(Unaudited)
Assets
Neo Medical convertible loan agreement	$	—	$	—		$	—		$	—		$	6,760
Neo Medical preferred equity securities		—		7,803			—			7,803			4,951
Other investments		—		—			—			—			1,309
Total	$	—	$	7,803		$	—		$	7,803		$	13,020
Liabilities
Lattus contingent consideration	$	—	$	—		$	(14,710	)	$	(14,710	)	$	(8,500	)
Deferred compensation plan		—		(1,709	)		—			(1,709	)		(1,674	)
Total	$	—	$	(1,709	)	$	(14,710	)	$	(16,419	)	$	(10,174	)

Neo Medical Convertible Loan Agreement and Equity Investment

Since October 2020, the Company has held preferred equity securities of Neo Medical SA, a privately held Swiss-based company developing a new generation of products for spinal surgery ("Neo Medical") and a Convertible Loan Agreement, pursuant to which the Company loaned Neo Medical CHF 4.6 million, or $5.0 million, at the date of issuance (the “Convertible Loan”).

In April 2024, the Company converted the Convertible Loan into shares of Neo Medical preferred equity securities. The preferred 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 Company's equity investment with Neo Medical is subject to certain sales restrictions, such as right of first refusal, tag-along provisions, and drag-along provisions. Permitted transfers include (i) sales of shares to an affiliate of such shareholder, (ii) transfer of shares as part of a compensation package offered to employees, or (iii) Neo Medical may repurchase shares at a price no greater than that originally paid by the shareholder.

The table below presents a reconciliation of the beginning and ending balances of the Company’s investment in Neo Medical preferred equity securities:


(Unaudited, U.S. Dollars, in thousands)	2024			2023
Fair value of Neo Medical preferred equity securities at January 1	$	4,951		$	6,084
Conversion of loan into preferred equity securities		8,224			—
Foreign currency remeasurement recognized in other income (expense), net		—			—
Unrealized loss recognized in other expense, net		(5,372	)		—
Fair value of Neo Medical preferred equity securities at September 30	$	7,803		$	6,084
Cumulative unrealized gain (loss) on Neo Medical preferred equity securities	$	(6,092	)	$	413

The following table provides a reconciliation of the beginning and ending balances of the Convertible Loan, which was measured at fair value using significant unobservable inputs:


(Unaudited, U.S. Dollars, in thousands)	2024			2023
Fair value of Neo Medical Convertible Loan at January 1	$	6,760		$	7,140
Gains (losses) recorded for the period
Recognized in other comprehensive income		1,671			109
Interest recognized in interest income, net		162			367
Foreign currency remeasurement recognized in other income (expense), net		(602	)		54
Reversal of expected credit loss recognized in other income (expense), net		260			—
Conversion into preferred equity securities		(8,224	)		—
Realized foreign currency loss recognized in other income (expense), net		(27	)		—
Fair value of Neo Medical Convertible Loan at September 30	$	—		$	7,670

Contractual value of Neo Medical Convertible Loan at September 30	$	—		$	6,328
Allowance for credit loss recognized in other income (expense), net		—			—
Amortized cost basis of Neo Medical Convertible Loan at September 30	$	—		$	6,328

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 is 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.

Lattus Contingent Consideration

In December 2022, prior to the consummation of the Merger, SeaSpine entered into a purchase agreement with Lattus Spine LLC ("Lattus") pursuant to which a contingent consideration obligation exists. Under the terms of the agreement, SeaSpine may be required to make installment payments at certain dates based on future net sales of certain products (the "Lateral Products").

The Company estimates the fair value of the Lattus contingent consideration 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 estimated future sales of the products, revenue risk-adjusted discount rates, 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):


(Unaudited, U.S. Dollars, in thousands)	2024		2023
Lattus contingent consideration estimated fair value at January 1	$	8,500	$	—
Contingent consideration assumed in the Merger		—		11,200
Increase (decrease) in fair value recognized in acquisition-related amortization and remeasurement		6,210		(2,100	)
Lattus contingent consideration estimated fair value at September 30	$	14,710	$	9,100

The following table provides quantitative information related to certain key assumptions utilized within the valuation as of September 30, 2024:


(Unaudited, U.S. Dollars, in thousands)	Fair Value as of September 30, 2024		Unobservable inputs	Estimate
Lattus Contingent Consideration	$	14,710	Counterparty discount rates	8.6% - 9.1%
			Revenue risk-adjusted discount rates	6.7% - 7.7%