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Fair value measurements and investments
3 Months Ended
Mar. 31, 2023
Fair Value Measurements And Investment Disclosure [Abstract]  
Fair value measurements and investments

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:

 

 

March 31,
2023

 

 

December 31,
2022

 

(Unaudited, U.S. Dollars, in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Neo Medical convertible loan agreements

 

$

 

 

$

 

 

$

7,180

 

 

$

7,180

 

 

$

7,140

 

Neo Medical preferred equity securities

 

 

 

 

 

6,084

 

 

 

 

 

 

6,084

 

 

 

6,084

 

Bone Biologics equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

 

 

 

 

 

 

 

1,829

 

 

 

1,829

 

 

 

1,726

 

Total

 

$

 

 

$

6,084

 

 

$

9,009

 

 

$

15,093

 

 

$

14,950

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lattus contingent consideration

 

$

 

 

$

 

 

 

(11,500

)

 

$

(11,500

)

 

$

 

Spinal Kinetics contingent consideration

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan

 

 

 

 

 

(1,415

)

 

 

 

 

 

(1,415

)

 

 

(1,515

)

Total

 

$

 

 

$

(1,415

)

 

$

(11,500

)

 

$

(12,915

)

 

$

(1,515

)

Neo Medical Convertible Loan Agreements and Equity Investment

In October 2020, the Company purchased preferred equity securities of Neo Medical SA, a privately held Swiss-based company developing a new generation of products for spinal surgery ("Neo Medical"), for consideration of $5.0 million. The Company also entered into 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 October 2021, the Company entered into a second Convertible Loan Agreement (the “Second Convertible Loan” and together with the Convertible Loan, the “Neo Medical Convertible Loans”), pursuant to which the Company loaned Neo Medical an additional CHF 0.6 million, or $0.7 million as of the date of issuance.

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 beginning and ending balances of the Company’s investment in Neo Medical preferred equity securities:

(Unaudited, 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

 

Fair value of Neo Medical preferred equity securities at March 31

 

 

6,084

 

 

 

6,084

 

Cumulative unrealized gain on Neo Medical preferred equity securities

 

 

413

 

 

 

413

 

The Company elected to convert the Second Convertible Loan into shares of Neo Medical’s preferred equity securities in January 2022. The Convertible Loan is recorded in other long-term assets as an available for sale debt security as of March 31, 2023. 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 flow model, requiring the Company to develop its own assumptions. Therefore, the Company categorized these investments as Level 3 financial assets.

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 a credit loss. As of March 31, 2023, the Company has not recognized any credit loss related to the Convertible Loan.

The following table provides a reconciliation of the beginning and ending balances of the Convertible Loans, measured at fair value using significant unobservable inputs (Level 3):

(Unaudited, U.S. Dollars, in thousands)

 

2023

 

 

2022

 

Fair value of Neo Medical Convertible Loans at January 1

 

$

7,140

 

 

$

7,148

 

Interest recognized in interest income, net

 

 

116

 

 

 

112

 

Foreign currency remeasurement recognized in other expense, net

 

 

61

 

 

 

(69

)

Unrealized loss recognized in other comprehensive loss

 

 

(137

)

 

 

(740

)

Conversion of Second Convertible Loan into preferred equity securities

 

 

 

 

 

(671

)

Fair value of Neo Medical Convertible Loans at March 31

 

 

7,180

 

 

 

5,780

 

Amortized cost basis of Neo Medical Convertible Loans at March 31

 

 

6,084

 

 

 

5,581

 

The following table provides quantitative information related to certain key assumptions utilized within the valuation as of March 31, 2023:

(Unaudited, U.S. Dollars, in thousands)

 

Fair Value as of
 March 31, 2023

 

 

Unobservable inputs

 

Estimate

 

Neo Medical Convertible Loan

 

$

7,180

 

 

Cost of equity discount rate

 

 

18.0

%

 

 

 

 

 

Estimated equity volatility

 

 

77.5

%

Bone Biologics Equity Securities

Until August 2022, the Company held an investment in common stock of Bone Biologics Inc. (“Bone Biologics”, NASDAQ: BBLG), a developer of orthobiologic products. The Company disposed of its remaining holdings in Bone Biologics equity securities during the third quarter of 2022.

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. As of March 31, 2023, this balance was classified within other long-term assets.

Spinal Kinetics Contingent Consideration

The Company recognized a contingent consideration obligation in connection with the acquisition of Spinal Kinetics in 2018. The estimated fair value of the remaining Spinal Kinetics contingent consideration, attributable to a revenue-based milestone, was concluded to be zero as of March 31, 2023, 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 Spinal Kinetics contingent consideration measured at estimated fair value using significant unobservable inputs (Level 3):

 

(Unaudited, U.S. Dollars, in thousands)

 

2023

 

 

2022

 

Spinal Kinetics contingent consideration estimated fair value at January 1

 

$

 

 

$

17,200

 

Decrease in fair value recognized in acquisition-related amortization and remeasurement

 

 

 

 

 

(5,500

)

Spinal Kinetics contingent consideration estimated fair value at March 31

 

$

 

 

$

11,700

 

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 as of the closing of the Merger, January 5, 2023, was $11.5 million. The estimated fair value of the Lattus contingent consideration is determined using a probability-weighted discounted cash flow model and significant inputs which are not observable in the market. The significant inputs include assumptions related to the timing and probability of the product launch dates, estimated future sales of the products, estimated commission rates, discount rates matched to the timing of payments, and probability of success rates. The Company determined that the estimated fair value of the

Lattus contingent consideration as of March 31, 2023, also approximated the fair value of the contingent liability as of the closing of the Merger.