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Note 4 - Fair Value Measurements
 12 Months Ended
Dec. 31, 2022
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

4. Fair Value Measurements

 

There were no available-for-sale securities as of December 31, 2022 and 2021.

 

The Company’s investments are all classified within Levels 1 of the fair value hierarchy and are valued based on 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

     
  

December 31, 2022

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Amortized Cost

 

Cash equivalents:

                    

Money Market Funds

 $67,801  $67,801  $-  $-  $67,801 

 

      

Active Markets

  

Significant Other

  

Significant

     
      

for Identical Assets

  

Observable Inputs

  

Unobservable Inputs

     
  

December 31, 2021

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Amortized Cost

 

Cash equivalents:

                    

Money Market Funds

 $67,046  $67,046  $-  $-  $67,046 
                     

Other current and long-term liabilities:

                    

Contingent Consideration - Short Term

 $4,315  $-  $-  $4,315  $- 

 

There were no transfers between fair value levels in 2022 or 2021.

 

 

Contingent Consideration

 

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

 

  

Years Ended December 31

 
  

2022

  

2021

 

Balance, beginning January 1

 $4,315  $35,410 

Additions

  -   - 

Payments

  (4,315

)

  (10,000

)

Change in fair value

  -   (21,095

)

Balance, ending December 31

 $-  $4,315 

 

Under the Parcus Medical Merger Agreement and Arthrosurface Merger Agreement, there were earn-out milestones totaling up to $100 million payable from 2020 to 2022. Parcus Medical had net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface had both regulatory and net sales earn-out milestones annually in 2020 and 2021.

 

In order to determine the fair value of contingent consideration at each reporting date, the projected contingent payment amounts were 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 earn-out milestone ranged from 3.1% - 3.4%. The weighted average cost of capital for Parcus Medical decreased from 11.4% as of December 31, 2020 to 11.3% as of December 31, 2021. The weighted average cost of capital for Arthrosurface was 11.4% as of December 31, 2020. Increases or decreases in the discount rate would result in a lower or higher fair value measurement, respectively.

 

As of December 31, 2021, a net sales growth milestone with respect to the Parcus Merger Agreement was achieved for 2021, and a liability in the amount of $4.3 million was recorded in current liabilities. This amount was paid in September 2022. In June 2021, the Company received regulatory clearance for a reverse shoulder implant system, which triggered a $10.0 million regulatory milestone payment per the terms of the Arthrosurface Merger Agreement. This amount was paid in July 2021. As of December 31, 2022, there were no milestones remaining.

 

The overall fair value of the contingent consideration decreased by $21.1 million and $28.7 million during the years ended December 31, 2021 and 2020, respectively, due primarily to the decrease in the likelihood that certain contingent milestones would be achieved.