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Note 4 - Fair Value Measurements | 6 Months Ended
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Jun. 30, 2020
Notes to Financial Statements |
Fair Value Disclosures [Text Block] |
4. | Fair Value Measurements
The Company held U.S. treasury bills of $20.1 million and certificates of deposit of $7.5 million at June 30, 2020. The Company held U.S. treasury bills of $27.5 million at December 31, 2019. Unrealized losses and the associated tax impact on the Company’s available-for-sale securities were insignificant as of June 30, 2020 and December 31, 2019, respectively. The Company’s investments are all classified within Levels 1 and 2 of the fair value hierarchy. The Company’s investments classified within Level 1 of the fair value hierarchy are valued based on quoted prices in active markets. Level 2 investments are based on matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk. For cash, current receivables, accounts payable, long-term debt and interest accrual, the carrying amounts approximate fair value, because of the short maturity of these instruments, and therefore fair value information is not included in the table below. Contingent consideration related to the previously described business combinations are classified within Level 3 of the fair value hierarchy as the determination of fair value uses considerable judgement and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability. The fair value hierarchy of the Company's cash equivalents, investments and liabilities at fair value was as follows:
|  |  |  |  |  | Fair Value Measurements at Reporting Date Using |  |  |  |  |
|  |  |  |  |  | Quoted Prices in Active Markets |  |  | Significant Other |  |  | Significant |  |  |  |  |
|  |  |  |  |  | for Identical Assets |  |  | Observable Inputs |  |  | Unobservable Inputs |  |  |  |  |
|  | June 30, 2020 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Amortized Cost |
Cash equivalents: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 49,357 |  |  | $ | 49,357 |  |  | $ | - |  |  | $ | - |  |  | $ | 49,357 |
Investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Bank certificates of deposit |  | $ | 7,514 |  |  | $ | - |  |  | $ | 7,514 |  |  | $ | - |  |  | $ | 7,524 |
U.S. treasury bills |  |  | 20,110 |  |  |  | 20,110 |  |  |  | - |  |  |  | - |  |  |  | 20,178 |
Total investments |  | $ | 27,624 |  |  | $ | 20,110 |  |  | $ | 7,514 |  |  | $ | - |  |  | $ | 27,702 |
Other current and long-term liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration- short term |  | $ | 11,688 |  |  | $ | - |  |  | $ | - |  |  | $ | 11,688 |  |  | $ | - |
Contingent consideration- long term |  |  | 37,062 |  |  |  | - |  |  |  | - |  |  |  | 37,062 |  |  |  | - |
Total other current and long-term liabilities |  | $ | 48,750 |  |  | $ | - |  |  | $ | - |  |  | $ | 48,750 |  |  | $ | - |
|  |  |  |  |  | Fair Value Measurements at Reporting Date Using |  |  |  |  |
|  |  |  |  |  | Quoted Prices in Active Markets |  |  | Significant Other |  |  | Significant |  |  |  |  |
|  |  |  |  |  | for Identical Assets |  |  | Observable Inputs |  |  | Unobservable Inputs |  |  |  |  |
|  | December 31, 2019 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Amortized Cost |
Cash equivalents: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Money Market Funds |  | $ | 48,971 |  |  | $ | 48,971 |  |  | $ | - |  |  | $ | - |  |  | $ | 48,971 |
Investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury Bills |  | $ | 27,480 |  |  | $ | 27,480 |  |  | $ | - |  |  | $ | - |  |  | $ | 27,479 |
There were no transfers between fair value levels during the six-month period ended June 30, 2020 or in 2019. Contingent Consideration The following table provides a rollforward of the contingent consideration related to business acquisitions discussed in Note 3.
|  | Six Months Ended |
|  | June 30, 2020 |
Balance, beginning January 1, 2020 |  | $ | - |
Additions |  |  | 69,076 |
Payments |  |  | - |
Change in fair value |  |  | (20,326 | )
Balance, ending June 30, 2020 |  | $ | 48,750 |
Under the Parcus Medical and Arthrosurface merger agreements, there are earn-out milestones totaling $100 million payable from 2020 to 2022. Parcus Medical and Arthrosurface each have net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface has regulatory earn-out milestones in 2020 and 2021. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model or a Monte Carlo simulation approach. The unobservable inputs used in the fair value measurement of the Company’s contingent consideration are the probabilities of successful achievement, the weighted average cost of capital used for the Monte Carlo simulation, discount rate and the periods in which the milestones are expected to be achieved. The discount rates used for the net sales and regulatory earn-out milestones ranged from 3.3% - 3.8%. The probability of successful achievement of the regulatory earn-out milestones range from 60%-90% for Arthrosurface, which remained unchanged from the acquisition date to June 30, 2020. The key variables that led to a decrease in contingent consideration versus the acquisition date are the decrease in near term revenues due to the COVID-19 pandemic and an increase in the weighted average cost of capital from 11.5% to 14.0% for Arthrosurface and 14.5% to 16.0% for Parcus Medical. Increases or decreases in any of the probabilities of success in which milestones are expected to be achieved would result in a higher or lower fair value measurement, respectively. Increases or decreases in the discount rate would result in a lower or higher fair value measurement, respectively. The fair value of contingent consideration is assessed on a quarterly basis. The $4.2 million increase in fair value of the contingent consideration for the three-month period ended June 30, 2020 was primarily due to an increase in revenue assumptions based on second quarter results and future projections, and other assumption changes as a result of events that occurred in the quarter. The $20.3 million decrease in fair value of the contingent consideration for six-month period ended June 30, 2020 was due to a decrease in the near term projections of revenue due to the COVID-19 pandemic.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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