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Note 4 - Fair Value Measurements
 3 Months Ended
Mar. 31, 2021
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

4.

Fair Value Measurements

 

The Company held U.S. treasury bills of $2.5 million at December 31, 2020. Unrealized losses and the associated tax impact on the Company’s available-for-sale securities were insignificant as December 31, 2020. There were no available-for-sale securities as of March 31, 2021.

 

The Company’s investments are all classified within Level 1 of the fair value hierarchy and are valued based quoted prices in active markets. For cash, current receivables, accounts payable, 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 classification of the Company’s cash equivalents and investments within the fair value hierarchy is as follows:

 

           

Active Markets

    

Significant Other

    

Significant

          
           

for Identical Assets

    

Observable Inputs

    

Unobservable Inputs

          
   

March 31, 2021

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Amortized Cost

  

Cash equivalents:

                                        

Money Market Funds

   $ 77,030     $ 77,030     $ -     $ -     $ 77,030  
                                         

Other current and long-term liabilities:

                                        

Contingent Consideration - Short Term

   $ 24,830     $ -     $ -     $ 24,830     $ -  

Contingent Consideration - Long Term

     5,760       -       -       5,760       -  

Total other current and long-term liabilities

   $ 30,590     $ -     $ -     $ 30,590     $ -  

 

 

 

           

Active Markets

    

Significant Other

    

Significant

          
           

for Identical Assets

    

Observable Inputs

    

Unobservable Inputs

          
   

December 31, 2020

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Amortized Cost

  

Cash equivalents:

                                        

Money Market Funds

   $ 74,522     $ 74,522     $ -     $ -     $ 74,522  
                                         

Investments:

                                        

U.S. Treasury Bills

   $ 2,501     $ 2,501     $ -     $ -     $ 2,524  
                                         

Other current and long-term liabilities:

                                        

Contingent Consideration - Short Term

   $ 13,090     $ -     $ -     $ 13,090     $ -  

Contingent Consideration - Long Term

     22,320       -       -       22,320       -  

Total other current and long-term liabilities

   $ 35,410     $ -     $ -     $ 35,410     $ -  

 

There were no transfers between fair value levels during the three-month period ended March 31, 2021 or in 2020.

 

Contingent Consideration

 

The following table provides a rollforward of the contingent consideration related to business acquisitions discussed in Note 3, Business Combinations.

 

   

Three Months Ended

March 31, 2021

  

Balance, beginning

   $ 35,410  

Additions

     -  

Payments

     -  

Change in fair value

     (4,820 )

Balance, ending

   $ 30,590  

 

Under the Parcus Medical Merger Agreement and Arthrosurface Merger Agreement, there are earn-out milestones totaling $100 million payable from 2020 to 2022. Parcus Medical has net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface has both regulatory and net sales 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 net sales estimates, 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 milestones ranged from 2.6% - 2.8%, and for the regulatory earn-out milestones the discount rate was 3.6%. As of March 31, 2021, the probability of successful achievement of the Arthrosurface regulatory earn-out milestones range from 0%-70%, as compared to a range of 60%-75% at the acquisition date. The weighted average cost of capital for Arthrosurface increased from 11.5% on the acquisition date to 12.1% as of March 31, 2021, and for Parcus Medical decreased from 14.5% at the acquisition date to 12.1% as of March 31, 2021. 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.

 

In October 2020, the Company made a regulatory-based milestone payment of $5 million pursuant to the terms of the Arthrosurface Merger Agreement as a result of regulatory clearance for the WristMotion Total Arthroplasty System. The fair value of remaining contingent consideration is assessed on a quarterly basis. The fair value of the contingent consideration decreased by $4.8 million during the three-month period ended March 31, 2021 due primarily to the decrease in the likelihood that certain contingent milestones would be achieved and result in payment.